Monday, March 10, 2014

The Potash Torpedo

Last July 2013 I reminded readers the torpedo-like collapse of the potash related stocks was a wake up call for those who may have forgotten that no fundamental or technical study works all the time. The collapse was in reaction to the break up of a Russian-Belarussian potash cartel.

So once again - the bad news on torpedoes - there is no fundamental or technical defence against your stock being hit by a torpedo. The good news is that you have choices on how to react to the torpedo. In other words, do you react and sell now, or do you not react and hold on to your position? The choice you make depends on the nature of the exogenous event.

If the exogenous event is deemed to be just the beginning of a series of unresolved issues such as in the Sino-Forest example, you should sell and don’t look back. If the exogenous event is deemed to be a one event issue that can be resolved by management, such as the Shoppers Drug Mart Corp collapse of April 2010 you should just hold on to your original position. In most cases the stock in question will pause, build a base and resume the original advance.

The technical rule is that a stock will only react (or torpedo) once in response to a one-issue exogenous event. So in the case of the potash stocks – as observed last July - if you were long, you just hold on to your original position and wait out the recovery as displayed in our weekly Potash chart.

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