Event-study strategy.

An event-study is a statistic method applied to the financial markets that has the purpose to measure the relevance/irrelevance of an event on the stock prices ; in other words, we value if an event is or is not price-sensitive, "over the normal returns", calculated by a market model through the following regression : 

R(stock) = α + β*R(benchmark)

R are the returns, expressed as a percentage, respectively of a single bond (the subject of the analysis) and of the benchmark (a market index).

α is the intercept.

β is the slope. 

An Event-study strategy has the aim to :

• value the relevance of an event (like the earnings releases, like a particular press release, like a macro-event and so on) ;
• value the impact and the statistical significance of the event ;
• measure the market moves of the insiders and the market mood, at the time of the event ;
• by combining the previous aspects, it means to make profitable a trade just buying or just selling the stocks (it depends on the specific situation) a moment before the event (some days, a week or a month before).  

The success of the strategy is not absolute but it is very true as the event is significative and repeatable. As known, the market is unpredictable and facing the same news, we could have a different market reaction. 

The following case shows the strategy. We speak about the full year 2016 results of Moncler S.p.A. The press release is dated 28, February 2017.

(To read the complete document, see the link https://monclergroup-dunebuggysrl.netdna-ssl.com/wp content/uploads/2016/07/Moncler_Press_Release_FY_2016.pdf). 

As the theory says, it needs to create a "window" in three parts :

1. Estimation window, useful to build the regression (usually, it is a period of 252 days) ;
2. Event window, the window of the event (it is a period of 6 days, 2 days before the event, the day of the event, and 3 days after the event, to cover any delays or news leaks) ; 
3. Post-event window, useful to value the impact of the event in the following days.

In this way, we can build the regression : we take the historical returns of the stock (Moncler, Y) and of the market index (FTSE-mib, X). The regression is shown in the following image. 

The parameters of the regression are the following (see the table).

For the returns (change %), I used the historical data from Investing.com and I put them on a spreadsheet. 

The estimation window is the period from March 3, 2016 to February 23, 2017 (in the image, there are some hidden cells, for space requirements).

The event window is the period from February 24, 2017 to March 3, 2017. 

The post-event window is the period from March 6, 2017 to March 31, 2017.

With the regression, we measure the abnormal returns (AR). 

The formula of the abnormal returns is :

(Effective return of the stock - Estimated return from the market model).

The estimated return is equal to [α + β*(effective return of the market index)].

The AR test t is : AR / STD.ERR.(YX).

To understand if the AR is significative and so if the event is price-sensitive, it needs to measure the statistic significance of the AR : is the absolute value of the AR test t is greater (YES) or less (NO) than 1.96 ? 

Abnormal returns (AR) in the event window

We can conclude that the earnings release impacted positively on the stock prices and that the event was significative. Just buying before the event, betting on the publication of good data, it would have been profitable. The following image shows the candlesticks chart of the event. 

Chart from Investing.com

As I previously said, the good success is basically based on the repetition of the event and the importance of the event itself. It means also that there is the same market reaction in every occasion (it is not so obvious). 

With Moncler, there are many aspects that confirm this, see the following link :

https://charts.stocktwits.com/production/original_67508754.?1479577951. 

Moncler S.p.A. : cash flow statement analysis.

Here we have the consolidated cash flow statement of Moncler (full year 2016 results). 

For further info, we can consult the following link (investor relations) :

https://monclergroup-dunebuggysrl.netdna-ssl.com/wp content/uploads/2016/07/Moncler_Annual_Report_2016.pdf

Consolidated cash flow statement

I will produce a detailed analysis of the cash flow statement with the aim of understanding if : 

1. The firm has a great financial balance ;
2. The core business is able to support the other areas (as it should normally be), investing and financing activities. 

At a glance, we can notice that the core business (operating activities) generates cash flow (+383,664). It is very important for a functioning business. If a firm absorbes cash flow from operating activities, it is not vey good. Substantially, it is a poor business. 

However, the investing activities and financial activities absorbe cash flow. A functioning firm should invest to grow (like Moncler with a negative cash flow from investing area > purchase of tangibles and intangibles fixed assets > -63,301). The financing area should generate cash flow (positive cash flow), to support the business and to grow, following the foregoing reasoning. Instead, the firm prefers repaying the debts (repayment of borrowings, -68,592). 

To summarise, the cash flow from operating activities should be positive and able to cover the financial needs from the other business areas. We are in a great situation with a positive cash flow from the core business and big enough to offset the cash outflows from the other activities. 

We are in a bad situation with negative cash flow from the operating activities and the other areas are not able to generate adequate cash flow to cover the cash outflows from the other business areas. 

The following table and the following  pie chart is very exhaustive. At the same time, Moncler presents a great financial balance and a core business capable to support the areas that absorb cash flow. Indeed, the total net cash flow is positive (a+b+c) and the percentage of the cash flow from operating activities compared to the percentages of the other areas is greater than 50%. There is also an improvement if we look at the fiscal year 2015 and at the fiscal year 2016 : from 54% to 61%.

Table of the cash flows and compared pie charts

To conclude, it is useful to calculate two ratios : revenues monetization index (also known as monetary ROS) ; EBIT liquidity index. The formulas are the following. 

Monetary ROS : Cash flow from operating activities / Revenues.

EBIT liquidity index : Cash flow from operating activities / EBIT.

The following chart shows the compared analysis. For the EBIT, I used the EBIT adjusted, due to the non-recurring items. 

Cash flow statement ratios

The two ratios are very good, as a percentage. The cash flow from operating activities represents the 27% of the revenues and the 88% of the EBIT. There is also an improvement from the full year 2015 to the full year 2016.

The volatility.

The volatility is an important parameter in the financial markets. 

It is useful to : 

• measure the underlying risk of an asset or portfolio (higher the volatility, higher the risk);
• set the market orders, stop loss, take profit, limit orders and so on (higher the volatility, "wider" the market orders) ;
• set the trading profile (higher the volatility with pure trader strategy and lower the volatility with pure investor strategy) ;  
• measure the market mood (higher the volatility with an important event price-sensitive ; "stock market fever", see also the VIX indicator). 

As there are so many purposes, in the same way, there are so many methods of measuring and indentifying it. At first, the classical measure is the deviation standard. To calculate it, it needs to import the historical returns of an asset to an Excel spreadsheet and then applying the following formula :

=  DEV.ST.POP (historical returns).

Historical data from Investing.com

Here, we have an image that clearly explains the case. The time-period can be daily, weekly, monthly etc, in the analyst's discretion and based on the purpose of the analysis (it means also holding period and investor perspectives). The ticker is APPLE. The time-frame is daily. 

Another measure is that provided by the graph (indicators).  

In this sense, it means respectively : 

• width of the real bodies and of the shadows (candlesticks chart ; wider the bodies and the shadows, higher the volatility) ;
• width of the Bollingers Bands (wider the bands, higher the volatility) ;
• magnitude of the volumes and so market interest (higher the volumes, higher the volatility). 

As shown in the following chart, there is the silmultaneous presence of more detectors (read the notes inside the graph). 

Chart from Investing.com

Indeed, BBW and HV are useful indicators to measure the volatility. There is a peak compared to the historical series (circled ellipses). The Envelopes (EV) have the same meaning of the BB : if the stock price is above or below the envelopes, there is high volatility in both directions.

Envelopes (EV) ; chart from Investing.com

To conclude, once measured and identified the volatility, every trader/investor should set his trading strategy accordingly, pursuing own profit and loss targets, of course. 

IMA S.p.A. : chart framework.

About the chart of IMA, we can notice a strong uptrend that began on October 2014 and it is still valid, from area 25 EUR to area 85 EUR. The great fundamentals of the firm have supported the good stock performance : it means good management and good shareholders remuneration, anti-cyclical business, good (geographical) diversification and uncorrelation from macro-events and italian economy (low beta). 

For further info, visit the official website (section investor-relations).

Of course, we got some breaks but we can consider them as small retracements that didn't damage the bullish trend. As shown in the chart, we have a primary trend with a parallel channel broke in area 70 EUR that brought the stock to the secondary trend with its parallel channel. The uptrend is also confirmed by the overcoming of the resistances (and of the resistance trasformed into the support).

Chart from Investing.com

Only with a break of area 85 EUR, it will be a continuation of the uptrend and only with a break of area 70 EUR, it will be a change in the trend : as usual, it needs other confirmations and volumes to more validate the signal. For this purpose, see also the chart with the FIBO levels.

Chart from Investing.com

With a LOG scale, we can appreciate clearly the chart framework (it is substantially the same as the previous chart). Indeed, the LOG scale is reccomended with long-term analysis and with great price excursions (it suits our case). Otherwise, the LINEAR scale is used for indentifying price levels, focusing on the absolute values and not on the relative values of the prices, like the LOG scale.

Chart from Investing.com

In other words, the LOG scale smoothes the market excesses. 

To know more about it, consult the following link : 

http://www.borsaitaliana.it/notizie/sotto-la-lente/analisitecnicascalalineareelogaritmica.en.htm

The slope and the structure of the EMA bundle certify the uptrend, too.

Chart from Investing.com

Anyway, in my opinion, I would await for the next market movements, in one direction or another : see the following chart. The overcoming of the BB allows only a trading range between area 75 EUR and 85 EUR (in this sense, in the short-term, it lacks a consolidated trend setting, of course). The uptrend is strong and it is almost immaculate, in the long-term.

Chart from Investing.com