Tuesday, January 11, 2011

TSM Watch

Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) is 17 days out from from its earnings announcement, on Jan. 28 before the open. I've had it on my Watchlist as a potential earnings play, but let's see if it really belongs there.

ppspfe trendpfe loc

I added TSM to the list just this last weekend on the strength of its 30.7% return on equity and its very low debt level, just a tenth of equity. The return on equity has risen each of the last five years, revenues have been up four out of five years and earnings per share, three out of five years.

In my analysis, I give priority to return on equity, second place to revenues or sales, and third place to earnings per share, which can be manipulated far more easily than the other two financials.

Despite a rocketing 26.2% price increase since Nov. 30, TSM remains reasonably priced, with a price/earnings growth ratio of 0.9. It also pays a 4% dividend, which you'll hate if you're Warren Buffet, and probably find agreeable if you're anyone else.

The recent run-up has put the price just below a major swing high set in March 2002. The price has decent room to run both to the upside and the downside.

Reversal Levels
  • $14.33, +6.9% (March 2002 swing high)
  • $13.40 --- You are here.
  • $12.51, -6.6% (20-day moving average)
  • $12.24, -8.7% (Jan. swing low)

Of course, it's an earnings play, and the questions are how surprise-prone is TSM, in what direction, and do the prices follow.

TSM tends to come in a penny above projections, although the most recent quarter saw a 4¢ positive surprise. The latter produced a decent price increase. The one-centers were followed by substantial price declines.

Because of that history, I don't like TSM as an earnings play. It might work to capture the exuberance during the run-up, but I would want to sell out prior to the announcement. And given the magnitude of the recent rise, I argue that the exuberance has already exubed its way into the price.

I could like TSM as a slow trade, although not a lot. The stock moved to confirmed bull phase last October on the monthly chart, and the confirmation line just this month broke above +50.

Monthly chart
ppspfe trendpfe loc

But with only 7% left before the price meets resistance to the upside, I don't see a lot of immediate benefit. I'd be much happier to see a bear phase and price decline on the monthly chart, so I could enter on the next switch to bull phase, at a lower price.

It's also a bit hard to structure a vertical spread for this stock. It only has six strike prices in the February stable, and they're $2.50 apart.

So, in all ways, at this point, I'll pass on TSM. I'll keep it in the Watchlist until after the earnings announcement.

  • pps - Person's Proprietary Signal.
  • pfe trend - Trend of the polarized fractal efficiency line.
  • pfe loc - Location of the polarized fractal efficiency line.

Key to the PPS/PFE tables
pps bull phase
bear phase
pfe trend uptrend
no trend
pfe loc +100 and above
+50 to below 100
0 to below +50
below 0 to above -50
-50 to above -100
below -100

PPS/PFE Analytical Tools

The analysis uses the daily Person's Proprietary Signal (pps), developed by John Person.

This is a black box signals -- the "proprietary" means that Mr. Person knows how it works under the hood, and I don't. But it has shown a fair degree of success in identifying good entry and exit points, and I find it useful.

For confirmation, the analysis uses an indicator called the polarized fractal efficiency (pfe) technical tool. It uses the fractal math of Benoit Mandelbrot to measure how efficiently move between levels. The higher the efficiency, the more directional the price trend.

The math for the pfe is public knowledge, but it is well above my math knowledge, and so to me is also a black-box signal.

This is a relatively new technical tool, based on fractal math. Investopedia has only a cursory explanation. Wikipedia is silent on the subject. ThinkOrSwim has a fuller explanation.

PPS/PFE Trading Rules

These rules are very preliminary. I’m still trying to figure out how the polarized fractal efficiency signal works.

When Person’s Proprietary Signal (pps) is in bull phase, enter when the polarized fractal efficiency (pfe) line crosses the zero line in an uptrend trend) A pps signal and pfe uptrend have less strength but greater upside potential when the pfe location (pfe loc) is below +50, and greater strength but less upside potential when the pfe location is at or above +50.

When the pps in in bear phase, enter when the pfe trend crosses the zero line in a downtrend. The set up has less strength but greater downside potential when the pfe loc is above -50, and greater strength but less downside potential when the pfe loc is at or below -50.

How should the pfe line be treated when it has flatlined at either end of its range, around +100 or -100. My preliminary observations are that the price by then has had a large run and tends to present a picture of exhaustion. However, by the description of the pfe, a high level should indicate a continued strong trend.

This is something that I’ll figure out as I go along.

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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