Sino Forest Corp caught in general market uncertainty

Aug 8th, 2011 – Comment

Given the current psychology in the market where even great companies with no question as to the validity of their claims are getting sold off it would be wise to be prundent.


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Lou Schizas is an equities analyst, investor, entrepreneur, professor and television and radio personality – and a true believer in the happiness-inspiring powers of capitalism.


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Hi Lou,
Great to have you back on twitter. Can you give me your take on Sino-Forest Corp. On the one hand, there were allegations of fraud, which dropped the value of the stock by 60 % since June. On the other hand, Singapore’s Mandolin Fund and Boston based Wellington Management Co. have bought into it big times and the stock value has risen substantially. What do you think will the future hold for TRE.TO.

As always, thanks for your analysis.

Bob

 

Hi Bob,

Thanks for the assignment. Sino Forest Corp. (TRE TSX) has had a rough time since early June when Muddy Waters LLC claimed that the company was involved in a number of fraudulent activities. That had investors selling with both hands tanking the stock to lows near $2.00 by mid June. There was a bounce as new institutional investors came in to buy up orphaned positions but as to your question is the current advance sustainable?

Given the current psychology in the market where even great companies with no question as to the validity of their claims are getting sold off  it would be wise to be prundent. Lets consult the charts for some guidance.

 

The three year chart illustrates the drop and the pop that started with the Muddy Waters comments. If you look closely at the RSI and MACD in April of 2011 they were both signalling that the momentum in the stock was shifting from buying to selling. As we got into mid June the RSI and MACD both indicated a shift back to buying as investors found some value in the rubble. The buying took the shares back to $8.00 where they met resistance and began to pull back.

 

 

The six month chart depicts what appears to be a cup and handle pattern forming. A cup and handle is typically a continuation pattern that would have suggested a move above resistance along the 50 day moving average.

However given market sentiment arising from the downgrade of debt issued by the United States at Standard and Poor’s it would be advisable to let the general selling frenzy abate before chasing any stock. Let alone one which has had its credibility put under the microscope.

It is in these times that we need to remember that all recessions and even depressions end. The only question will be who and where you will be when it is over.

 

Make it a profitable day and happy capitalism!

 

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