This is a quick follow-up to my last post on Molycorp (MCP): “Molycorp Positioned for A Fresh Rally.”
Sometimes, you just can’t make this stuff up. MCP has now been trailing the 50-day moving average (DMA) for three weeks. Over the last three days, MCP has touched or crossed the 50DMA only to fall back below this trendline. These three days have robbed MCP of the follow-through I was looking for to confirm a fresh rally ahead for MCP.
An even more interesting pattern has emerged in the Bollinger Bands (BBs) which represent volatility in a stock. MCP’s BBs are tightening as the stock follows a tight range upward and volatility drops, also known as a “Bollinger squeeze.” The tightening of MCP’s BBs can be observed with the upper and lower bands converging toward the middle band (the 20DMA).
The old adage is that periods of low volatility lead to high volatility and vice versa. The Bollinger squeeze is a notable reduction in volatility that precedes a burst of higher volatility. MCP’s squeeze is confirming a major move, but I was betting on that next move being a rally. The last two squeezes, as seen in the chart below, produced a strong downward draft. Just in case this detour to a fresh rally occurs again, I have hedged my MCP position a little. Note that buying interest still dominates selling interest in recent action. I remain overall net long.
*Chart created using TeleChart
Be careful out there!
Full disclosure: long MCP
ya, it’s obvious you know what you’re talking about.. ever since your bogus chart analysis, MCP havs taken a full on dive losing 17%. what happened to this huge break out to the upside?
This article was an update to the previous one. The situation quickly changed from “bullish” to “cautious” and I reflected that by mentioning I was hedging the position in this article. My latest update here: http://drduru.com/onetwentytwo/2011/06/08/molycorp-overhang/ where I review my calls on MCP.
Dear Doc–You provide the most fact-based and clearest, and most useful, views on MCP that I have seen. Glad that I discovered your blog. Thanks, Warren
Dear Doc–Question: why do you think that MCP did not even budge below the $51 offering price yesterday (6/60/11)and at one point trade up a few %–in the face of the 172-point Dow plunge? Was it short covering? Was it stabilization by the underwriters? The latter doesn’t seem too likely given the massive 19 million share volume–if there were real selling pressure, wouldn’t that have made it impossible for the underwriters to stabilize to that degree? And short-covering? There couldn’t have been that many pre-existing short, rights. Interested to know what you think. Thanks, Warren
Hi Warren,
Thanks for the comments. It is often hard to guess about the motivations of the masses, but I will give it a shot given the current context. The $51 offering price produces a mental bookmark for traders. If MCP goes below $51 before the execution of the offering, MCP will be forced to postpone or cancel the offering altogether. But if the mental bookmark works, it can provide the floor needed. As of May 31, MCP had 8.3M shares short (http://finance.yahoo.com/q/ks?s=MCP+Key+Statistics). It is entirely possible that a massive amount of these shorts closed out at the open and drove the price up temporarily. Upon seeing the spike, more shorts returned given the awful day the overall stock market had. We will see very son how well the floor holds since MCP traded right back to that level. Assuming the underwriters think $51 is a steal of a price, they could definitely get into the market and sop up supply at these levels.
Don’t forget we also have to contend with the institutional buyers of convertible who decide to short MCP to hedge their notes. I am guessing that they are not interested in shorting the stock below $50 or 51. But they will apply pressure from higher prices until the convertible is executed (June 15th as well).
Then you have bulls like me who recognize that MCP at $50 is likely a steal, and we step in and initiate/add to positions when the sellers offer the supply at these attractive prices.
A LOT of things could be going on!
I hope that helps.
Hi Doc, Thanks very much and also for such a quick response. That helps a lot indeed to clarify what’s going on. Hope you don’t mind a few further questions.
1. Why does execution date matter so much, and how could the underwriters cancel an offering that’s already sold?
2. If the offering is somehow still contingent, does that mean the underwriters will try the absolute best to stabilize the $51 offering price?
3. Heavy rare earths. Mountain Pass apparently does not produce the heavies. Can it process heavy rare earth ores?
Thanks again,
Doc–one more Q.
Yesterday, it seemed to me, from a quick look at the June and July puts and calls that show up on Schwab Streetsmart.com,that there were as many call buyers, maybe more, as compared to put buyers around $50-55, almost no activity below $50 on the out side. Does that indicate anything to you?
Thanks again,
Ask away! I will do my best to answer or send you to a better reference.
My understanding is that the offerings are not officially sold until the execution date. For example, imagine MCP falls another 10% between now and then, the buyers would start with an immediate and large loss. I don’t think anyone would accept a deal where they commit to a price on one date and get no liquidity for another week or so. So, yes, everyone involved has an incentive to keep the price stabilized between now and then, but such efforts are not guaranteed to succeed either. MCP has some heavies, but it is mostly a play on lights REEs. See here for more info on heavies: http://www.molycorp.com/otherrareearths.asp
Options activity is always tricky to interpret since you have motivations of buyers AND sellers to contend with. However, if there was no activity below $50, it is a good sign that there aren’t many who believe MCP will fall below $50 in the near-term.
Doc,
You’re the nicest to take the time to answer my questions. I really appreciate it!
Can you give an idea about your short vs long position in terms of % dollar wise and general price levels? Thanks so much,
I’m all long now. Posted the trade on twitter unloading the last of my hedge on Friday: http://twitter.com/#!/search/%24MCP%20%23120trade
Will take it day-by-day to see whether I hedge again.
Doc, Thanks so much again! Best,
Doc, I have been looking into the types of REEs that MCP will be able to process either at Mountain Pass or in Estonia and whether they have the “heavy” REE ores. From what I have read, they do not have lots of the heavy ones at this point, but also that it is the processing more than the ores themselves that provides the most value added. Will report anything significant that I learn. Best,
Doc, What do you think of $MCP’s performance y’day? Seems to me, with all the bad economic news, the double public offering, Lynas crashing for days on end, REE down again y’day, MCP’s Sumitomo deal’s pricing reported questioned, MCP performed relatively well. Do you think, barring really bad market conditions, that bottom is in?
“The bottom” call is always a tough one. What I stick by is that MCP is ridiculously cheap here and it only gets cheaper the lower it goes. 🙂 I am ready to buy more if it gets to $40 or so, but I am not anticipating such bargain-basement specials without a general market correction, a more severe correction that is.