Monday, April 22, 2013

BIG: Bull breakout, with topping

Big Lots Inc. (BIG) broke above its 20-day price channel on Monday and confirmed the bull signal the next trading day (Monday) through transactions above the breakout level, $36.44.

The signal comes amid a recovery during a downtrend that began March 27, 2012 from $47.22 and stair-stepped down to $26.69 on Nov. 16, 2012 before beginning the present leg up.

A move above $42.26 would set a higher high, defining a possibility that the downtrend was over.

BIG has been moving in a sideways trend for the past seven weeks, which is consistent with the prior correction top in the present downtrend.

Moreover, the previous correction reversed at the 61.8% Fibonacci level, which is also level reached by the current correction. (Investopedia's explanation of Fibonacci retracement can be read here.)

A bull play at this point is a bet that the correction will will press on to higher levels. Using the classic support and resistance analysis, I think it's a fairly risky bet.

This is BIG's 4th bull signal since the present downtrend began. Two of the three completed trades were successful, with an average yield of 8% on positions enduring for 49 days. The unsuccessful trade lost 13% in eight days.

The yield spread between the winners and the loser stands at negative 5%, a vote in favor of the bearish case.

BIG has produced 18 bull signals since the post-recession crash ended. The 10 successful signals yielded 14.9% on average and lasted 41 days. The seven failures lost 5.5% and lasted an average of 19 days.

The other symbols to survive my screening -- MANU and AGPYY -- both broke out to the upside and confirmed the bull signals on Monday. However, they are both far less liquid than BIG is, and they are relatively recent issues and so lack the history on which to base a decent odds analysis. (Read my "Monday's Prospects posting here.)

Big Lots, based in Columbus, Ohio, is a closeout retailer with a wide range of product categories, including food, healthy and beauty, plastics, paper, chemical and pet food as well as upholstery, mattresses and other furniture.

It operates 1,533 stores in the United States and Canada.

Analysts have no problem curbing their excitement about BIG, collectively coming down with a negative 43% enthusiasm rating.

This is despite a return on equity of 25% and fairly low debt amounting to 23% of equity. If the debt were at 10% or lower BIG would qualify as a growth stock by my definition.

Like most retailers Big Lots peaks in the 4th quarter holiday shopping season. Looking at the past 11 quarters, Q4 of 2012 was higher than the corresponding quarter of 2011, which was higher than Q4 2010. The company as reported a loss in one quarter, the 3rd quarter of 2012, and has surprised to the downside four times, compared to seven upside surprises

Institutions own nearly all of the shares, and the price is quite cheap; it takes 39 cents in shares to control a dollar in sales.

BIG on average trades 587,000 shares a day, enough support a fairly small selection of option strike prices. Open interest, however, runs to three figures, and the bid/ask spread on front-month at-the-money call spreads is 7.1%, fairly narrow for a stock of that level of liquidity.

Implied volatility stands at 35% and has been moving sideways since mid-March.

Options are pricing in confidence that 68.2% of trades will fall between $33.03 and $40.35 over the next month, for a potential gain or loss of 10%, and between $34.93 and $38.45 over the next week.

Trading in options is lackadaisical, with calls running at 62% of their five-day average volume, and puts at 49% of average.

The fair-price zone runs from $36.36 to $36.62, encompassing 68.2% of transactions surrounding the most-traded price, $36.46. With three hours to go before the closing  bell, BIG is trading near the top of the zone, having broken above it in a two-hour run up and then subsequently having pulled back.

Big Lots next publishes earnings on May 20.

Decision for my account: There's nothing to hate about BIG based on the odds or the financials. However, seven weeks of topping at a Fibonacci retracement level identical to the previous retracement's reversal level is too sketchy for my taste. 

Bull signals, unlike ice cream, don't really benefit from topping.

True, the price has broken slightly above the ceiling of the topping period for the first time since it began. But it's not a strong break. So I'm passing on the trade. I won't be opening a bull position in BIG today.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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