My recent post suggested that the fall in the share price from the mid 40’s to around 30 could have been ‘manipulated’ down by shorters and that by doing so they had created an atmosphere of extreme negative sentiment once again. (The recent posts confirm this very negative sentiment.)
What seemed strange is why sellers had the confidence to push the share price down at a time when progress is being made particularly in the Philippines with increasing evidence of Government/DOE support (see links in previous blog).
A recent note stated that EWC may be taken out of the MSCI Small Cap index at the end of November i.e. the 30th. The decision (on whether or not) will be made on 14th November.
This may help explain the collapse in the price. In previous posts I stated that I believed shorters (usually hedge funds) are well informed but in particular they are very good at exploiting moves in and out of indexes at the expense of passive/index funds.
By shorting the shares and pushing the price down the shorters increase the probability EWC is remove from an index. If they get the desired result passive/index funds are forced to sell. The shorters then hope to buy back the shorted shares from the passive funds at a lower price.
This has potentially provided investors with another opportunity to profit from short term trading activity particularly if/when a connection is confirmed.
How has this played out before?
EWC had been included in a number of indexes over time. It has been taken out of two of them, the ASX 200 index on 21st March 2014 and the ASX 300 index on 20th March 2017.
I have provide extensive data on shorter behaviour around these times in previous blogs.
In both cases the shorters ‘manipulated’ the share price from the mid 40’s down to around 30 cents. In both cases sentiment turned very negative with the falling price. Following the removal from the index the share price rallied up to around where it started i.e. mid 40’s within 3 to 6 months.
The last time EWC was removed, was interesting because the shorters had manipulated the price down to 30 cents but the crossing of a large amount of index shares occurred above this, at 33 cents on the day and maybe some as high as 38 cents a few days later. This usually occurs when there are other buyers competing for stock and the fear of missing out on the volume/liquidity event creates buyer tension.
How could it play out this time?
Already the stock has dropped from mid 40s to below 30 as in the previous cases.
In my view fundamental value has again been significantly exposed. In addition there is increasing evidence of Government/DOE support for the Philippines project has recently increased materially (I have provided some links in previous posts showing this and since then a recent ERC “Decision” released on October 26thhttp://www.erc.gov.ph/Files/Render/issuance/18602 provides further evidence) to the point where it is reasonable to conclude a connection will happen and should be forthcoming in the near future.
The risks for the shorters (and investors) are now:
EWC is not taken out of the index (the shorters will certainly do all they can to ensure the conditions for removal will be satisfied being well versed with what conditions/trigger points are required i.e. I expect the decision will be to remove EWC).
A connection deal announced prior to the end of November. This would really stir things up given the current investor cynicism and total lack of interest. Many potential investors (rightly so to date) are probably still sitting on the side waiting for confirmation of a connection.
Another buyer wanting to buy the stock coming out of the index at end of November.
To make money this month investors will need to monitor the price action, the shorting behaviour and the way the bots work to find the right time and price to invest. The shorters on the other hand will be trying to use the bots to push the price down and will ‘manipulate’ the data (which they have done in the past) to hide what they are doing. The most recent data released shows manipulation already starting.
In my view, the potential profit from buying fundamental value together with the significant option value within EWC significantly outweighs the potential profit from this short term shorting for liquidity reasons. Let’s see what happens by year end.
EWC Price at posting:
26.5¢ Sentiment: Buy Disclosure: Held
(20min delay)
