Tuesday, January 31, 2012

BDC: Cable guys

Belden Inc. (BDC) of St. Louis, Missouri makes cables and related products for networking. Everyone is either building a network or expanding their present network, so it's stock with a good story.

The chart is less than awesome. It began its present rise in early October 2011, at $23.24, peaking lat Friday, Jan. 27, at $40.45. The rise was interrupted by a lengthy sideways contraction that lasted all of autumn and into winter.

BDC was the most bullish chart among 31 stocks added to Zacks top buys today. The Zacks method is based primarily on analyst opinion. See my essay "10,000 Charts" for a description of my chart screening process.

Longer term, BDC is a stock that has gone nowhere for more than 15 years, zigging and zagging between around $60 to around $10. There's a lot of money to be made in zags and zigs of that magnitude -- don't get me wrong. But BDC is not a shoot-for-the-moon play.

The price is at a resistance level, set in February 2011 and needs to beat $40.41 to count as a breakout. Beyond that there is resistance at $42.97 set in June 2008, and once that is past, it is clear sailing up to the July 2007 peak of $60.

The financials, by contarst, look pretty good. The return on equity is 15%, and the debt equity ratio is 0.78 -- higher than I like but not awful.

Institutional ownership is listed as 103%. I'm not sure how that's possible, but it means that the big players love Belden. And the price is reasonably cheap. It takes only 94 cents in stock to buy $1 worth of sales.

Belden is a moderately liquid stock, with average volume of 220,000 shares a day. That, however, has not translated into a great selection of options. There are only eight February strike prices available, and the most open interest on any strike is 16 contracts. The bid/ask spread is abysmal: $2.90/$6.80 for the at the money February call, for example.

BDC announces earnings before the open on Feb. 9. The company pays a small dividend, yielding 0.51% annually, with the next ex-dividend date due sometime in March.

Decision for my account: I would consider a bull play upon a decisive breakout above the $40.41 level, and even more on a breakout above $42.97. But I would want to see some movement before committing my funds. The lack of decent options is a barrier, because it makes it impossible to enjoy the leverage that options provide. So even with a breakout, the options situation might well be a deal-killer.

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.

PAA: Nice chart, but few big players

Plains All American Pipeline L.P. (PAA) of Houston, Texas manages crude oil and natural gas -- liquified and otherwise -- from where it was got to where it is useful, with all that such an operation implies: Transportation, storage, terminalling, marketing, refining. There's a lot going on with this company. To top it off, the company has been on an aquistion tear the past couple of years.

PAA was the most bullish chart of 16 selected at random from 675 large-cap companies. I describe my screening methods in an essay, "10,000 Charts".

The company's stock has been on the rise since early October 2011, with two corrections, carrying the price from $54.90 to $77.86. The most recent leg up began Jan. 13 at $72.57.

The story for an energy company like PAA is elementary: The economy is recovering, expanding industries need more fossil-fuel energy, and PAA can provide it.

The chart hit blue-sky territory in December 2011, and since then has traded above all previous price levels.

So, good chart -- good story. and pretty good financials: The return on equity is 14%, and earnings have been on the rise from the third quarter of 2010.

Yet the price is dirt cheap -- 37 cents will buy $1 worth of sales, and the institutions are staying way. They own only 35% of the stock. And the company pays a relatively high dividend, yielding 5.29% at present. (Under the Warren Buffet theory of investing, retained dividends suggest a stronger company, and PAA is giving the money back to shareholders rather than using it to increase value.)

All of which is a great big caution sign for me. If the big guys aren't crazy about PAA, given its fine chart, then maybe I shouldn't be so crazy about it, either. They might -- whisper it -- actually know more than I do.

The company is liquid, trading on average 458,000 shares a day. The ex-dividend date is Wednesday, Feb. 1, and earnings will be announced Feb. 8 after the close.

The stock has a fine selection of options, with some strikes having four-figure open interest and all having reasonable bid/ask spreads. Implied volatility has been in the lower 20% or upper 10% range since mid-December 2011, suggesting the position is best played as long options or as shares.

Decision for my account: If earnings weren't so close, then I would open a bull position. Even with earnings close, if the warning flags weren't so obvious, then I would open a position. But the combination of earnings just around the corner and the warning flags -- low price to sales, low institutional ownership, high dividend -- make me take pause. So, no trade today. I'll take another look on Feb. 9.


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.

Monday, January 30, 2012

EQIX: Future memes

Equinix Inc. (EQIX), from its headquarters in Foster City, California, south of San Francisco, runs data centers to serve its 35 markets in the United States and Europe.

It plays into the future memes of our time: Cloud computing, global integration, customer experience. It provides the robust bones and sinews that give strength to early 21st century enterprise.

Given the forward nature of its business, I find it amusing that its chart maps nicely to that of almost any sort of enterprise -- new tech or old -- that went through the recent recession -- a decline from 2008 into a major low in 2009, and a strong recovery thereafter, although one marked by stumbles.

What makes the EQIX chart stand out today is that last week, on Jan. 26, it moved above its pre-recession  high for the first time, hitting $121.75. In the ensuing two days of trading, the price has pulled back, but it is positioned for a breakout, and that makes it worth a closer look.

EQIX had the best chart, in my judgment,  of 16 stocks picked at random from a pool of 675 large capitalization companies.  (See my essay "10,000 Charts" for a discussion of how I screen stocks.)

The price began its most recent upswing on Oct. 4, 2011 at $82.43, a rise that picked up serious momentum beginning Jan. 5 from $100.47.

For the momentum trader, the question is whether the price will push decisively past its $121.75 high into a further upswing. No one knows, but the fact that the stock is trading, for a third day, within the range of the breakout day suggests there is powerful sentiment for the bullish case.

Analyst opinion, on average, views EQIX as a strong buy. The financials, however, don't paint EQIX as a growth stock. The return on equity is only 4%, and debt-to-equity is high, at 1.51.

And it's expensive. It takes $3.77 in stock to buy $1 in sales -- no surprise, with institutinoal ownership at 97%.

So for the trader, EQIX lacks subtlety. This is no stealthy play. EQIX stands up and shouts, "Hey, I'm a hot stock. Buy now! Look what I've already!"

The stock has average volume of 1.2 million shares, and the options selection is quite good, running from $55 to $140 for the February expiration, mainly at $5 intervals. Open interest runs as high as 3,000-plus.

The trader's question is this: Since EQIX is so obviously hot, has everyone already gotten on board? Is there more money waiting to come on board and drive the price higher?

The most recent rise was on increasing volume, suggesting that there is still buying interest.

Implied volatility is somewhat high, standing at 51%, up from 38% on Jan. 6, when the present rise began. High volatility is generally something I like to sell -- through short options positions for a net credit.

Decision for my account: I've opened a February bull put spread, short the $115 strike and long the $110 strike, for a net credit.


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.

FBMI: Community Banker

Firstbank Corp. (FBMI) headquartered in Alma, Mich. -- north of Lansing in the middle of nowhere -- had the second best chart of the 17 stocks newly added to Zacks top buys list.

The very best chart was Apple Inc. (AAPL), but since AAPL gets written about all the time everywhere by everyone, I've decided to go with #2 for my write-up rather than add to the Applish punditry.

(See my essay "10,000 Charts" for a discussion of how I select stocks.)

FBMI is no Apple. It has an average volume of 6,023 shares a day compared to Apple's 14.4 million. A share of FBMI costs $6. Each share of Apple sells for more than $450. FBMI runs seven small banking subsidiaries, all in Michigan. Apple is a powerhouse of technical innovation that spans the globe and no doubt looks forward to an iPad 4 accompanying astronauts to Newt Gingrich's colony on the Moon.

To see them both on the same top picks list is a little shocking, even more to see them with competing for top chart.

FBMI is not a jump-out-obvious pick for a bull play. Like all banking companies, its stock suffered greatly from the collapse of global finance. After hitting bottom in 2010 at $3.98, it remains far below the $22 range it saw during the good old days before the crash.

AAPL -- a much more obvious chart even if the trader knew nothing else about the company -- also saw a sharp recession decline, bottoming in 2009, but it has since pushed ever upward to new heights.

I like FBMI's chart precisely because it is in the early days of its recovery. Any dollar that could be invested in AAPL is already invested. FBMI is still a bit stealthy.

From its low, FBMI's stock has set a high, and a lower low, and is on the way back up, on volume, as it challenges resistance set last July. Once it soaks up that money, there will be no resistance until the prior high at $7.51, set in early March 2011. Any move above that level marks a higher high and therefore establishes an uptrend.

FBMI stresses local control and community lending by its banks. That puts it at the forefront of the economic recovery, if in fact the economy is recovering. (I judge that it is, but there are many naysayers about.)

The financials are nothing to cheer about -- return on equity is 3%, debt to equity is 0.53 (a bit high, but that's common for banks), and price to sales is 0.72. Price/earnings is 11.73 -- not high at all.

Earnings have been accelerating the last new quarter -- 15 cents in the 3rd quarter of 2011 and 22 cents the 4th quarter, and revenue has increased in each of the last four quarters.

Amazingly, FBMI does have some institutional owners, who hold 17% of shares.

So, for me, this is a different sort of play. It's not a momentum stock, except in the narrowest of senses. It's more of a value play, perhaps -- buy low and wait for the high?

The King of Value, Warren Buffet, would hate FBMI because it is small, illiquid and unknown outside of its narrow region. Yet arguably, it will be such small community banks that power the better known brands as better times return, be it manufacturing start ups or the new restaurant in town that everybody loves.

FBMI has no stock options. It is shares or nothing. For a practical trading, it's the sort of stock that I would buy and stick in the corner of my trader's hope chest, and I would pull it out once a year to see how it's doing.

Decision for my account: I'm not opening a position in FBMI because it is tied to such a narrow geographical region, and moreover, one that is prone to industrial collapse. Moreover, although Michigan is smart state with a lot of talent and manufacturing wisdom, I'm not convinced that manufacturing is in fact the American future. A community bank in a community that looks to the past has a dismal future.



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.

Sunday, January 29, 2012

The Week Ahead: Jobs

This is jobs week in Econoland, a week filled with sneak previews of the employment and unemployment report, to be released on Friday.

An economist of my acquaintance, back when I wrote about the Michigan economy as a young wire-service reporter, always greeted my phone calls for comment on employment with finger-tapping impatience.

It's a trailing indicator! -- he would say -- It tells where we've been, not where we're going, so it's not interesting.

And he was quite right. Unemployment -- a layoff or a failure to find work -- or employment -- the creation of a job -- are both driven by events far in the past. They're the end game of the process, not the cause.

Past sometimes is prologue, but not always. So the smart economist -- and the smart trader -- will be looking at indicators upstream from jobs as a guide to the future.

Even so, the unemployment and employment figures will motivate a large number of traders during the week, a fact that, however unreasonable, must be taken into account.

On Monday, the week kicks off at 8:30 a.m. Eastern with personal income and outlays, and from those are derived the savings rate.

Tuesday starts the jobs theme with the employment cost index at 8:30 a.m. That is followed by the S&P Case-Shiller home price index in 20 metro areas at 9 a.m., the Chicago purchasing managers index at 9:45 a.m. and consumer confidence at 10 a.m.

More jobs on Wednesday, with the Challenger job-cut report at 7:30 a.m. and the ADP employment report at 8:15 a.m. ADP gets its data from the payrolls it handles. Also, motor vehicle sales throughout the  day, construction spending and the Institute of Supply Managements manufacturing index at 10 a.m., and petroleum inventories at 10:30 a.m.

And yet more jobs on Thursday, with the jobless claims report at 8:30 a.m. Also out, productivity and costs, also at 8:30.

And finally, Friday comes, and the Labor Department releases the real deal: The employment situation report at 8:30 a.m. Also out on Friday, factory orders and the ISM's non-manufacturing index, both at 10 a.m.

Dallas Fed Pres. Richard Fisher is the lone Fedster speaking during the week, at 7:15 p.m. on Thursday. He stood among three Federal Open Market Committee members who voted last summer against expanding the money supply further to encourage economic growth.


Fisher took office under President George W. Bush. His resume shows institutional ties to former Secretary of State Henry Kissinger’s strategic advisory firm, the private bank Brown Brothers Harriman Inc., and his own money management firm.

Practical trading: By my rules, as of Monday I can trade March vertical and calendar spreads, and May singles and straddles. Of course, shares are good at any time.

Good trading!

Friday, January 27, 2012

GPC: Parts for everything

Genuine Parts Co. (GPC) provides parts for the automotive after-market, industrial replacement parts, office products and electrical/electronic materials to customers in North America. The company's headquarters is in Atlanta, Georgia.

The auto parts group, operating under the brand NAPA, is a household name (at least if you're the member of the household who tinkers with the family car).

The industrial unit provides parts to fix machines big and small, and the office unit sells stuff ranging from adhesive notes and file folders to electric hand-dryers. The electrical/electronics unit sells products that seems to be aimed more toward guys who know how to use soldering irons.

So GPC is what a call a kitchen-sink niche company. They find an area where they can make stuff that's used all over the place, and then broaden the market in every way possible. A good capitalist practice.

The chart suggests that the practice is paying off, in the eyes of traders at least. 

Like nearly all companies, GPC has been on the rise since early 2009, the recession bottom, but the most recent increase, beginning Aug. 9, 2011, has been a steady alternation of increase and correction that has carried the price from $46.10 to a high of $65.38 on Jan. 19 , about a week ago. Since then the stock has traded sideways, mainly within the intra-day range of Jan. 19.

The price broke decisively into blue-sky territory in October 2011, surpassing all previous highs.

I've spoken about my liking for blue-sky stocks. I must also confess a weakness for corrections. Show me a stock that has gone up steadily without a break, and I'll conclude that it is most likely overbought. Periodic corrections, which shake out some traders, ensures that there's money on the table that might be interested in coming back into a position.

GPC had the most bullish chart of 17 stocks added today to Zacks list of strong buy recommendations. (See my essay "10,000 Charts" for a discussion of how I select stocks.)

GPC has a solid 19% return on equity with low debt, at 17% of equity. The price is also low compared to sales; it takes 82 cents of stock to control $1 in sales. Institutional ownership is 70%, which is neither low or high.

Taking the financials as a whole, I conclude that GPC has room to grow. It's easier to increase debt/equity from 19% than it is from a 30% starting point. If seven out of 10 shares are owned by institutions, that means there are institutions still out there that might eventually be interested in buying.

Earnings will be announced on Feb. 21 before the open. The quarterly dividend yields 2.78% at present, with the next ex-dividend date due in March.

The stock is well provisioned with options having slightly over-wide bid/ask spreads, despite the fact that its average volume is a bit low, at 653,000 shares.  The implied volatility is way low, at 26%, and stands lower than any level seen in the last six months. The peak implied volatility, in early October, was 52%.

With volatility that low, I'm reluctant to enter any short position on options. With volatility, the rule is buy low sell high, suggesting I would want to buy call options rather than taking advantage of time decay by setting up a short bull put spread.

The question, then, is whether the spreads are too wide for such low volatility. The May $60 calls have a bid/ask of 4.20/7.30, with open interest at present of 748 contracts. That's a liquid position, but a very wide spread.

Decision for my account: I'm really conflicted about this position, because of the bid/ask spreads. I'll pass for today and revisit the question on Monday. One alternative would be to buy shares rather than options, since the spreads are far narrower, but of course, the leverage is lacking.

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.

Gold: A Chart Talk

I woke up this morning to lots of happy talk about gold. Indeed, happy days for gold may again be here soon, but -- peace to Ron Paul and all the other goldbugs out there -- not yet.

I am a gold sceptic. Here's my reasoning:

In the summer of 2007, as housing markets collapsed and people got nervous about the banks, gold began an huge rise from around $660 an ounce to $1,034 by March 2008, only to collapse back to $681 in mid-October.

From that point, gold began a truly epic rise that peaked in early September 2011 at $1,924.

Since then, the price has stairstepped down, hitting the its latest lower low the day after Christmas at $1,524.

Then began the current increase that has the financial chit-chatters all excited, bumping the price up to its current level, $1,738 (so far today).

These are truly big numbers, but they must be seen in proportion.

One reason I'm unwilling to break out the champagne to celebrate gold's "recovery" is because the current level is only a 50% correction of the decline from last September.

Secondly, that decline saw an interim lower high of $1,804 in November 2011. Gold's price is still well below that level.

So on the chart, we have a lower low, and a lower high. That's a downtrend. If the price breaks above $1,804, it would set a higher high and there may be cause for celebration. But that level is 4% away, and cautious traders would require that a higher low be set before the uptrend was confirmed.

Thirdly, the present correction of the rise from 2008 is a mere 15%. The prior correction, of the rise from 2007 into 2008, amounted to 93%.

The two corrections aren't even close to proportional. Now, there's no rule that requires proportionality, but a smart trader will want to see some proof on the chart before accepting a 15% correction as sufficient to mark the start of a significant rise.

Epic advances require epic challenges before the advance continues. Fifteen percent is no epic.

And at that level of analysis, the next higher high that would signify a long-term uptrend is 11% away.

Does that mean stay out of gold? Not for my account. There is money to be made in these short-term moves. There's money to be made in moves of an hour or half-hour, for that matter.

But the days are not yet back when a trader could buy gold and hold it for months and years as the profits rolled in.


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.


Thursday, January 26, 2012

AME: Broad specialists

Ametek Inc. (AME) makes electronic instruments and electro-mechanical devices.

That bloodless description hides the company's overwhelming number of  business divisions that serve specialized markets: Aerospace and defense, chemicals, floor care, measurement and calibration, power systems -- the list goes on and on.

AME appears to hold that middle stretch between upstream raw material manufacturers, such as a plain-vanilla chemical company, and downstream finished product makers. AME makes specialized things that enable the downstream companies to make finished goods from the materials of the upstream companies.

So is a company with a broad range of specialties. As I looked at their list of divisions and business units, my first thought was, "What a managerial challenge this company must pose."

But the suits at company headquarters in Berwyn, Pennsylvania -- just south of Valley Forge, where Gen. George Washington and his army spent a difficult winter -- seem to be doing quite well, thank you very much.

Their stock chart and financials point toward that conclusion, as do the big-money managers, whose institutions own 84% of the stock.

AME was one of 21 stocks added today to Zacks top buy list. Today's runners-up are VCBI in 2nd place, POOL in 3rd and PLCM in 4th.

The careful reader will say, "Wait, didn't I see AME mentioned in Private Trader a few days back?" And that is true: It was a runner up in my chart rankings when it was previously added to the Zacks list.

The Zacks rankings rely heavily on analyst opinion, which is volatile even in the best of times. So I've found that it's not unusual to see Zacks add a stock to its best buy list, drop it a few days later, and then add it again a few days after that.

This is one reason why I tend to be a short term trader.

I chose AME from the new additions because it had the most bullish chart. My essay "10,000 Charts" describes how I go about making my selections.

The most recent price rise began Oct. 4, 2011 at $30.87 and has continued, with three corrections, to today's high of $47.75 (so far). The recession low was $16.36 in March 2009, and that rise was interrupted by a major correction during the summer of 2011.


Implied volatility stands at 38%, at the low end of the range that has held since early December 2011. Low implied volatility implies trader complacence, which translates into a willingness to open bull positions. So the price and the implied volatility are in line.


I liked the chart because the most recent rise brought the price into blue-sky territory, above any previous trading. And the breakout, above the high of $47 set in April 2011, is recent -- it happened today.

So if the breakout is indeed what it appears to be, any bull position will be getting on the train as it leaves the station. If the breakout fizzles, which happens a lot with stocks -- well, that's what stop/losses are for.

Also, the rise of the last 10 days has been marked by slightly higher volume -- always a good validator that a rise has some enthusiasm behind it.

AME's return on equity is 20% -- approaching growth stock territory -- but the debt, at 0.54 times equity -- is a bit overly aggressive for my taste. However, borrowing costs are at historical lows. So as long as the money is put to productive use, that debt level isn't a deal-killer for me as a trader.

The price is expensive -- it takes $2.58 in stock to gain control of $1 in sales -- and that is an indicator of buying enthusiasm for AME.

As an aside, there are two ways of looking at the price/sales ratio.

A value investor will look for a low ratio, assuming that stock price will rise to equal sales which, in turn, will also be rising, at least if the value investor has chosen wisely. So the value investor, standing sedately on the station platform, quietly folds his or her umbrella and calmly steps on board, trusting that the train will leave the station sometime in the future.

A growth investor will look for a higher price/sales ratio, treating it as an indicator that the train has already left the station and it's time to madly ride his or her horse alongside the train and leap on the roof in order to not be left behind.

The stock is a bit low in liquidity, with average volume of 874,000 shares, and that is reflected in AME's weak options selection. There are only 10 strike prices in the February options, and open interest is in the low double digits with pathetic bid/ask spreads: 0.30/4.90 for the at-the-money February call option.

So any bull position, under my rules, would need to be in shares.

Earnings were announced this morning before the opening -- 63 cents per share vs. 61 cents expected -- so the next earnings will be sometime in April, as will the next ex-dividend date for the quarterly payout, now yielding 0.51%.

Decision for my account: I'm passing on AME because of the poor options selection. If I buy shares alone, then I lack leverage.



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.

Wednesday, January 25, 2012

EMN: Global chemicals

Eastman Chemical Co. (EMN), headquartered at Kingsport in eastern Tennessee, makes chemicals, plastics and fibers in nine countries, serving a global market.

It's an upstream company selling the stuff that others downstream use to make other stuff. I have mixed feelings about upstream operations. They tend to deal in commodity products, with little to distinguish one company from its competition. But they tend to serve very broad markets, since what they produce can be used in lots of different ways.

But that's the story. And my analysis is all about charts.

I selected EMN from 15 stocks added today to Zacks top rank. (See my essay "10,000 Charts" for a discussion of how I select stocks.)

The charts, for the most part, were pretty awful. It was difficult to choose between them in their badness. It was a case of choosing the lesser of evils. In other words, it was very much like voting in an American election.

So EMN is the best of a bad lot, and as such, it's not too bad. The price began its current rise from a recession low of $8.88 in March 2009, and since then has risen with only three major corrections, none of which set a lower low.

The stock peaked in late April 2011 at $55.36 and from there began a brutal correction that sent the price plummeting by September down to $35.26. It has since began a rather slogging sort of recovery.

The most recent push up began Dec. 19, 2011 at $35.68, and the rise has carried to today's high of $47.11 (so far).

On this chart, I like the momentum from December. There was a stumble over the past eight trading days, but that has been erased, in my view, by today's strong rise.

I dislike the fact that the price is moving through territory that it surveyed as recently as last summer. There may well be some distressed money still in the stock that will be looking to get out at the next available break-even point.

Also, volume dropped off sharply in mid-January, from 3 million shares on Jan. 13 to 1.3 million the next trading day, Jan. 17. And it has dropped pretty steadily in the ensuing six trading days.

A rise without volume lacks conviction. A rise without conviction often signals that the end is near.

The return on equity is pretty flashy for an industrial materials maker: 30%. That's growth stock territory. The debt/equity ratio is 0.84, much higher than I like to see.

Institutional ownership is at 78%, which is a respectable level but not an enthusiastic one. And the stock is cheap in terms of sales, with a price/sales ratio of 0.94.

Implied volatility is at 39%, the lowest level since December, and has been declining since Jan. 17, when it stood at 44%.

Falling volatility suggests optimism that prices will continue to rise.

The company announces earnings after the close on Thursday, Jan. 26. It pays a quarterly dividend, now yielding 2.2%, with the next ex-dividend date due sometime in March.

EMN has a decent selection of options, with nine strike prices for February expiration and three-figure open interest in the close in strikes. The bid/ask spread is quite narrow, $2.75/$2.85 for the at-the-money February call.

Decision for my account: I bought June calls on EMN today, with a $45 strike price. With earnings so close, this was incautious. But we're in an earnings season marked with optimism, so I'm trading with the zeitgeist -- admittedly, at my peril.



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.

Tuesday, January 24, 2012

MNST: Monsters in a can

Monster Energy, Java Monster, Monster Energy Extra Strength Nitrous Technology, Monster Rehab, Peace Tea, Hansen’s, Hansen’s Natural Sodas, Junior Juice, Blue Sky, X-Presso Monster, Vidration, Worx Energy, Admiral, Lost Energy, Hubert’s, Rumba, Samba and Tango.


The company? The chart? The finances? Fuggedaboutit! Monster Beverage Corp. (MNST), first and foremost, simply has some of the coolest drink names in the business.

That's not exactly a bullish indicator, of course. Monster's energy drinks don't yet threaten to stomp all over Coke and Pepsi like Godzilla did to Tokyo.

But the chart is fairly impressive. And the financials are in growth stock territory. And the company's stock is emulating one of its drinks, Blue Sky. The price has been in blue sky territory, above all previous prices, for more than four years.

The stock touched its recession low of $11.73 in November 2008. It's interesting to note that the month, despite the sharp fall, ended with the stock at $29.75. Altogether, the monthly range was an astonishing $18.24, nearly two-thirds of the closing price.

Since then the price has been on the upward track, with a few short-lived corrections.

The most recent leg up began on Jan. 12 at $93.13, and made a highest-high today of $105.99 (so far).  

The sharpest daily rise of the leg, last Friday, showed a peak in volume, which declined significantly the next  day, Monday. The peak volume for MNST the past few days has tended to come in the final hour of trading, and that level has declined for three days running.

The highest volume so far today came in the 11 a.m. Eastern hour, which had the smallest distance of the day between the open and a higher close.

Generally, a rise on declining volume suggests there's not much conviction among bull-side traders. So the volume I'm seeing on MNST's charts suggests that traders are losing interest.

MNST had the most bullish chart among 24 stocks added today to the Zacks top buy rating. NVLS was 2nd, followed by ROP at 3rd and POL at 4th. (See my essay "10,000 Charts" for a discussion of how I screen.)

MNST's return on equity is 32%, a figure that indicates really effective management, and it has zero debt. So the company is strongly positioned to handle crises that might arise in the course of doing business.

Strong financials alone will often bring in investors. That is the case with MNST, whose stock price has been bid up to $5.67 for each $1 in sales. Institutional ownership is 72%, a respectable level but not in the top rank.

The average volume is 888,000 shares. That's a good degree of liquidity, and it supports a handsome selection of options -- 17 strike prices at $5 intervals, with narrow spreads.

Average implied volatility is 36%, compared to 19% for the S&P 500. High volatility is sometimes treated as a measure of fear -- the higher it is, the more traders are worried about the company.

However, MNST's volatility was running in the upper 40% range last November. It bottomed on Jan. 13 at 29%. So the level is low compared to mid-term levels, but rising in the short run. Near term, there's a divergence, and the direction is back toward the November levels. To complicate the picture, volatility fell today.

That pattern must be figured into any decision about how to play the stock. A trader wants to buy low volatility and sell high volatility. That means for low volatility, buy stocks and options for a debit. For high volatility, sell options for a credit.

MNST announces earnings on Feb. 23. It is scheduled to undergo a 2:1 split on Feb. 15.

Decision for my account: I bought call options today. I settled on the $105 strike, just in the money, with a June expiration. I went for a long, debit position because of the mid-term low implied volatility and today's downward turn.

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.

Monday, January 23, 2012

Covered Calls: A difficult season

'Tis the season for covered calls! (Fa-la-la La-la-la and all of that.)

And a difficult season it is. The January calls expired Saturday, and I'm moving my money over to the February calls, which expire Feb. 17.

What's difficult?

First, it's a short options month, expiry to expiry -- 27 days rather than the ideal 30. So that's three less days of theta gain on the short options.

Second, it's an earnings month and a very significant one, since this is being thought of as the earnings season that determines whether the recovery is in fact catching fire. Earnings disappointments are certain to meet with strong reactions from traders.

Third, volatility is way, way low. The VIX, which measures the volatility of S&P 500, is at a pathetic 18.16% about 75 minutes before the close. At the start of last November, it was double that, at 37.53%. So the short options are returning much less than they were when volatility was higher.

My analysis over the weekend uncovered 11 stocks that I considered to be reasonable covered call plays. They are, in descending order of return (at the time of my analysis): LVS, ESRX, STX, LULU, CAT, DOW, AAPL, MYL, CBS, MON and LRCX.

(The return can change dramatically with market moves, so I always recalculate before trading.)

I didn't even bother to screen exchange-traded funds, which always have lower volatilities than stocks do.

My criteria are volume of around 3 million shares or more, price of $20 or more, an option premium of $1 or more, and a return, if the option is exercised, of at least 3%. I had to fudge the premium and the return in order to find any covered calls this trip out.

Also, I picked from a pool of stocks ranked buy or strong buy under the Zacks system, which is heavily titled toward analyst opinion.

I opened a few positions for my account today, and will leg in with a few more over the next couple of days. But honestly, it's arguable that traders will do better with instruments other than covered calls in the present environment.

It's also arguable that buying prior to Wednesday is pure foolishness. The Federal Open Market Committee makes its rates announcement on that day, Fed Chairman Ben Bernanke holds a news conference, and the FOMC members, for the first time ever, release their individual forecasts of future rates.

So the cautious trader will stand back until late or Thursday. My thought was that the FOMC's actions will most likely be surprise free, and that growing confidence in an economic recovery will continue to dominate, so I threw caution to winds. I shall soon find out if it was an act of sheer brilliance or one of total stupidity.


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.



EXR: Something EXtRa


Extra Space Storage Inc. (EXR) is a real-estate investment trust specializing in self-storage facilities. One side-effect of the 2008 collapse of capitalist finance was that more people are renting because fewer people can afford, or get financing, to buy a home.

I rent -- I prefer to keep my money liquid in equities and currencies -- and I can tell you that it is an absolute fact that every renter needs more storage space. So arguably, EXR seems to have seized the zeitgeist and is riding it to Profitburg.

The company is based in Salt Lake City, Utah and owns 660 self-storage facilities all over the country.

The price began stair-stepping up in mid-March 2009 from its recession low of $4.93. The most recent leg up began on Oct. 4, 2011 at $17.29 and has continued to rise steadily with three quite mild corrections.

The stock set a new high today but quickly retreated into the range of Friday's price rise and is at present (about three hours before the close) doing a good imitation of a spinning top on the candlestick chart, a sign of indecision.

EXR is a blue-sky stock. Last March it exceeded its pre-recession high of $20.55, set in 2007 and has stayed above that level since last October.

It is the most bullish chart out of 24 that have been newly ranked strong buy under the Zacks system, which is heavily tilted toward analyst opinion. FL was in 2nd place, URI in 3rd and SNX in 4th. (See my essay "10,000 Charts" for a discussion of how I screen stocks.)

The blue-sky nature of the EXR chart was decisive in its selection for the top spot. But there is a shadow on the chart: The volume.

One difficulty in analyzing equities during this period is that volumes are down. Increasing volume adds credence to a price increase, but the price rises I've seen during recent screens have generally been on declining volume.

I could weave that observation into a narrative of a weakening bull market -- prices are up but traders really aren't all that interested.

Or I could stitch up a counter-narrative asserting that traders are sitting on the sidelines until the Euro crisis is resolved, and then there will come an explosive rise in the markets (no doubt accompanied by fireworks and the EU's anthem, courtesy of Beethoven's "Ode to Joy").

But honestly, I don't know what to make of it. So I'm simply choosing the best of what's at hand, and setting careful stops/loss levels. The future is unknown. The past is untouchable. Only the present lies within my grasp.

EXR, quite frankly, lacks financial bling. Its return on equity is a pathetic 4.6%. It is wallowing in debt, with a debt/equity ratio of 1.23.

Yet, its price has been bid up to nearly eight times sales, meaning as a trader I've got to cough up $7.76 to buy $1 in sales. Institutions love it, owning 95% of shares. It's a liquid stock, with an average volume of 758,000 shares a day.

So, bling or no, the big money obviously thinks EXR is a decent play.

EXR pays a quarterly dividend yielding 2.2% at present, The next ex-dividend date will come in March. Earnings will be announced Feb. 21.

The options inventory is weak -- only five strike prices for February with no open interest to speak of. Even the next month out has top open interest of only 104 contracts. And the bid-ask spreads are huge: $0.50/$5.40 for the $22.50 February call, for example.

 So EXR is a shares plays in my book. Which has the advantage of providing a dividend, so it's not all bad.

Decision for my account: I bought shares in EXR today. I don't like the price/sales ratio, but who am I to argue with the chart? Or the big money?



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.


Sunday, January 22, 2012

The Week Ahead: Policy and a Report Card

This week's focus is monetary and fiscal policy, and the 1200-pound-gorilla of report cards on how we've been doing. It is a week with more than usual potential to motivate traders.

Monday is quiet -- just a few T-bill auctions.

On Tuesday, the Federal Open Market Committee begins a two-day meeting to discuss monetary policy, and President Obama, at 9 p.m. Eastern, gives the State of the Union Address to Congress, wherein fiscal policy -- read "jobs" -- is sure to stand front and center.

Oh, and in an action having potential impact on future policy, GOP presidential candidate Mitt Romney will make available his 2010 tax return and a 2011 estimate sometime on Tuesday, no doubt hoping the details -- he estimates his Federal tax rate at 15% -- will be buried in an avalanche of Obama budget proposals.

Hmmm. Now if I were one of the president's speech writers, I would be looking for a way to say something about rich people's taxes that would land at least a mention of Gov. Romney's tax return in paragraph 2 of any State of the Union story. 

The Federal Reserve announces results of the FOMC meeting on Wednesday, at 12:30 p.m., and Fed Chairman Ben Bernanke follows with a news conference at 2:15 p.m.  

The Fed's day will be especially interesting because FOMC members will, for the first time, release their individual forecasts for the central bank's key interest rate: The Fed Funds Rate, now standing at 0.08%. The fedsters' forecasts will be anonymous -- more's the pity -- but the release will provide insight into the body's thinking, and the breadth of the forecasts will say something about their unity of opinion, or lack of.

Also on Wednesday, the energy sector gets a weekly petroleum inventory report at 10:30 a.m., followed at the same time on Thursday by the natural gas report.

But Thursday will be dominated by three major econ data dumps: Durable goods orders and weekly jobless claims at 8:30 a.m., and new home sales at 10 a.m.

Durable goods and new home sales are basically confidence indicators, for big manufacturers and regular families, respectively. Weekly jobless claims say something about why confidence stands where it does.

Finally, on Friday, The Report Card -- the Gross Domestic Product -- gives us a first look at how we were doing as an economy in the 4th quarter of 2011.

This week's GDP is the advance figures -- the first stab at calculating growth or decline. There are two more Q4 releases -- the preliminary in February and the final in March -- that will refine those numbers.

And of course, all of this is happening at the peak of 4th quarter earnings releases, as corporations rate their own performances, as the law requires.

So there are a lot of moving wheels this week, which will make it all very interesting.

Practical trading: By my rules, as of Monday I can trade February vertical, calendar, diagonal and butterfly spreads, iron condors and covered calls, and May singles and straddles. Of course, shares are good at any time.

Good trading!

Friday, January 20, 2012

CBS: Watching the Eye

CBS Corp. (CBS) is television, one of what used to be called the Big Three television networks.

But it is also an information/entertainment conglomerate -- films, the premium cable channel Showtime, radio stations, outdoor advertising... Even books: CBS owns Simon & Schuster, one of the giants of the book publishing industry.

So when analysts start talking nice about CBS, it's good to listen. CBS was among the 21 companies raised to Zacks top rank today.

The CBS chart didn't make the cut when I did my screening, but for fairly disputable reasons. The price dropped sharply today, setting a higher high near the open but then dropping to a lower low at a micro level.

The volume on the weekly chart has declined steadily during the most recent rise, from $17.99 in early October 2011. Declining volume on a rising price is not a bullish sign.

And the chart looked as though CBS is setting a double top, or perhaps it could turn out to be a head-and-shoulders -- either way, a reversal pattern.

Otherwise, it's a great chart. The stock has risen from a recession low of $3.06 in early March 2009 to a peak of $29.68 on July 18, 2011.

That peak would be the first top, or the first shoulder, if the stock is indeed readying for a major reversal pattern. A break above that level could indicate formation of the head, or it could be a straight breakout -- a very big deal.

Today's high was $28.87, so that major breakout/resistance level isn't far away.

CBS has a respectable return on equity of 13%, and a slightly high debt/equity ratio of 0.61.

The price is reasonable for a growing stock -- a 32% premium over sales.

With 85% institutional ownership, it's clear that the big money has taken a fancy to CBS.

Average volume is 5 million shares, so its a very liquid play with a full suite of options and narrow spreads.

Decision for my account: I like the chart once the price breaks above the current high and stays there rather than falling back, as it did today. I like it even better once the price moves above the July peak of $29.68. 


I don't plan to open a position today. I'll keep an eye on CBS for a future play, and shall consider it for February covered calls, to replace my January covered call holdings, which expire on Saturday.



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.




GOOGle's stumble: A post-mortem

Google Inc. (GOOG) stumbled big time at the open after missing a revenues projection.

How bad is it on the chart? What were the warning signs?

Amusingly, in light of all the OMG LOL GID* chit-chat that followed the downward gap, from Thursday's close of $639.57 to today's open of $590.53 -- a decline of 7.7% -- GOOG has yet to set to set a new lower low in the rise that began in early October 2011.

A lower low would require a drop below the Nov. 25, 2011 low of $561.33.

So from a chart standpoint, it's not the end of the world. Subsequent moves may indeed prove to be apocalyptic, but GOOG isn't there yet.

And today's move should not have come as a total surprise. The chart showed signs and symptoms that something was amiss.

The price peaked, most recently, at $670.25 on Jan. 24. That day was followed by three trading days of wide intra-day declines that brought the price down to a low of $616.91 on Jan. 10. The decline overall was 8%.

The price then spent four days in a sideways pause -- a balance between buyers and sellers of the shares -- and then on Thursday gapped up on high volume, fell back into the prior day's range, and then retraced upward, forming a candlestick pattern called a hanging man, signalling a top reversal.

If I had been daytrading on Thursday, I might have initially treated the move as a breakout and bought shares, but I would have sold them late in the day as I saw the hanging man developing.

And frankly, I doubt that I would have played the breakout. The prior multi-day decline of 7.7% is large, and I'm usually reluctant to play counter such trend on the basis of a single day's move, especially when the preceding sidewinder was only four days.

(At least with stocks. I might have taken it on a currency pair, where trends tend to be more stable and breakouts more reliable.)

At any rate, the lesson for traders is a banality from the old TV police drama Hill Street Blues: "Be careful out there."

And more banalities from me: Keep your wits about you, and keep your eyes on the chart.
------
* Google is Dooooomed!



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.

CTBI: Icebergs on the chart

Community Trust Bancorp Inc. (CTBI) is a Pikeville, Ky. bank holding company that provides the usual suite of bank holding company services. The company is highly ranked by analysts. Web chit-chat says insiders have been buying shares. It is expansionary, having bought another bank in the last year. Earnings are up.

Basically, CTBI is a well managed bank that is participating in the recovery of the financial sector, and traders think will benefit further as the rest of us catch up to the money.

CTBI was one of 21 stocks added to Zacks' top rank today, and my analysis found it to have the best bullish chart of the lot. (See my essay "10,000 Charts" for an explanation of my screening methods.)

BAM came in 2nd, followed by TRGP at 3rd and LMCA at 4th.

CTBI, like all other stocks, peaked in 2006. But oddly, when the Great Recession ground more innovative companies to new lows and into the muck, CTBI retraced a mere 61.8% of its preceding six-year rise, pausing at that Fibonacci level.

It has since made a run up to the 23.6% retracement level, falling short at a peak of $37.17 in January 2009, and since then has gone basically nowhere.

But, it has gone nowhere with grandiosity, in a series of wide swings, and what is happening now on the chart is the most recent upward swing.

The current rise began in early Oct. 2011 at $22.28, and carried up, with a five-week sideways pause, to today's high (so far) of $30.89. The price has pushed above the most recent prior peak and now is preparing to challenge the April 2010 peak of $31.56. The next peak before that is $37.22 in late December 2008.

CTBI going forward can best be seen, I think, as a series of breakout attempts. If it fails to push above each peak set in its long, zig-zaggy course, then it's time for the trader to heed the chart and exit, post-haste.

That's a long way of saying: This is not a chart that I love.

I'm not alone. Institutional ownership is only 45%, way low for an up and comer.

However, return on equity is 11% -- respectable -- and the debt/equity ratio is 0.59 -- not horrifying.

And traders have bid the price up to 2.66 times sales per share. So, someone out there clearly has high hopes for the future.

To summarize, CTBI offers you the chance to pay triple the sales value for a moderate return on equity and a sort of highish level on debt in a small banking company, unaccompanied by a mob of enthusiastic big-money managers. Plus, average volume is 38,000 shares, and it has no options.

Hey, what's not to like?!?

CTBI next announces earnings on April 20. Its quarterly dividend, at 4.02% per annum, is due in March.

Decision for my account: I love Zacks, but this stock looks like a faith-based play, and I don't love Zacks that much. The low volume, the lack of options, the high price/sales ratio, and the previous resistance levels lined up like icebergs during the long zig-zag movement -- all feel to me like a Titanic moment in the making. 


No trade for me at this point. A break above the April 2010 peak -- $31.56, or 2.4% above the present level -- might cause me to reconsider. If I were a very long term trader, then I would think about stashing some CTBI in my hope chest. But my higher velocity approach means I've got better uses for my trading funds.

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.

Thursday, January 19, 2012

MEOH's meth means money

Methanex Corp. (MEOH), based in Vancouver, BC, is a leading supplier of wood alcohol to global markets. Their product is known to scientists as methanol -- that's where the company gets the "meth" in its name. It is used mainly to make other chemicals, mainly formaldehyde, and from there is used in manufacturing products from plastics to plywoods to paints.

So MEOH is a classic bottom-of-the-food chain company. It needs a lot of downstream companies to prosper and provide a market for its product -- broad customer base; a good thing -- and requires economies of scale to remain competitive in such a broad market -- giant company; also a good thing.

MEOH has the most bullish chart among 16 stocks added today to Zacks top ranking. The runners up are AME in 2nd place, CATM in 3rd and CZNC in 4th.

What distinguished MEOH among the final four was high volume during up-bars on the hourly chart. AME volume was uppity during both rises and declines. It's a very small difference, but volume counts. And when the decision reaches two closely matched charts, it is often a choice between intraday volume and flipping a coin.

(See my essay "10,000 Charts" for a discussion of my screening methods.)

MEOH has been on the rise since Dec. 29, 2011, with only one retracement -- a five-day fall following an upward gap. Altogether during the rise, the stock has gapped three times at the open.

Altogether, the price rose from $21.83 in late December to $28.31 at today's high so far. The price has since retraced from that level but remains above yesterday's close. (I'm writing shortly before 2 p.m. Eastern.)

Longer term, MEOH hit an all-time high at $34.90 in May 2011 that retraced about half of the distance from its Great Recession low to May's high. Today it moved back to the 23.6% retracement, a Fibonacci level that often represents resistance or support.

The story behind MEOH's rise is obvious. The global economy is recovering, and MEOH is part of that, re-opening shuttered plants and negotiating new supply.

And it's doing quite well, thank you very much, with return on equity of 13%, although that comes with a cost, a debt/equity ratio of 0.77.

The big money clearly expects more growth. Institutional ownership is 82%. The price has been bid up to 1.03 times sales, meaning there's no discount from parity.

So the numbers paint an optimistic picture for a liquid stock. The average volume is 463,000 shares.

The options selection is limited, with only seven strikes available in February, but with three-figure open interest on calls surrounding the at-the-money level, and four figures for one of the put strikes. The bid/ask spread is decent, running $3.30/$3.90 on the near in-the-money call.

The next quarterly dividend is due in March. Earnings will be announced Jan. 27 after the close.

Decision for my account: The option pricing really doesn't give me sufficient return for a bull put spread. So my choice is to buy call options at $390 per 100-share contract, or shares at $2,772 per 100. I've opened the long call position, with April expiration, because it gives leverage.



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.

Wednesday, January 18, 2012

Vox populi vox VOXX

VOXX International Corp. (VOXX) is a distributor of consumer electronics headquartered on Long Island just outside New York City.

VOXX's main brand is Audiovox, but it has a lot of other labels for its products, such as RCA, Acoustic Research, Jensen and the newly acquired Klipsch. It also provides OEM components to the auto industry.


So car stereos, remote control units, mobile media, home electronics -- VOXX distributes stuff that's ubiquitous, but you've got to search your head to remember the brand name (the historical RCA being the exception).

In a sense, the voice of the people (in their ears, at least) is the voice of VOXX, but few are aware of it.

VOXX's chart is the most bullish among the 21 stocks added to Zacks top rank today. (See my essay "10,000 Charts" for an explanation of how I screen.) UAN was in second place, and CPWM in third.


The stock began its most recent upswing in early October 2011, at $4.69, and peaked today at (so far) $12.25. That's nearly a three-fold increase that grabs my attention, certainly. The only pause is the rise came during five weeks in November and December.

VOXX gapped up a spectacular $2.12 on Jan. 10, after earnings per share exceeded analyst expectations by 28%, with a volume that day of 855,000 shares -- this on a stock that normally trades below 100,000 shares in a day.

The price ended down a bit on gap day, and has in the five ensuing days risen, and today broke past the gap-day high.

So it's a classic bull chart -- steadily higher highs and higher lows with good news greeted by exuberance. 

Clearly, the rise is future oriented, based on hope rather than past performance. Return on equity is about 8% -- OK but nothing to celebrate. The debt/equity ratio is 0.19, not overly high but not low either. Institutional ownership is 65%, not down in the cellar but certainly with a foot through the cellar door. 

But price to sales is 0.37, which is astonishingly low. Anyone who buys VOXX is getting it for a song.

The low volume precludes any options position under my rules. There are only five strike prices for February, and only one strike has any open interest -- seven contracts. So it's shares or nothing for this play.

The next earnings announcement is May 16.

Decision for my account: I've bought share of the stock.

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.

Tuesday, January 17, 2012

DELL: Game of Triangles

Dell Inc. (DELL) -- a major computer maker, headquartered outside of Austin, Texas  -- is showing some serious triangulation on its weekly chart that might suggest interesting times ahead for traders.

There are two overlapping triangles, both having a floor stretching from the low the week of Aug. 23, 2010 through a higher low recorded the week of Aug. 15, 2011.

Triangle #1 is a larger-scale ascending triangle with a base ceiling at $17.52 (the week of April 12).

Triangle #2 is a symmetrical triangle with a base ceiling from the high set the week of July 18.

The symmetrical triangle can be seen as having broken out last week, and the breakout has continued this week. The triangle two base is $4.31 wide. The breakout point was about $15.68. So, triangle lore would have it that the upside target is $19.99 -- round it up to $20.

Triangle #1 won't reach braekout until it tops $17.52.

Dell reached the Triangle #2 ceiling through a 10-day rise that interrupted by only two stumbles, both followed by rapid recoveries. Analysts are also looking more kindly on DELL, amid chit-chat about how the company is reinventing itself.

The price has been in a sideways pattern since August 2009, with big swings that alone can produce plenty of profit.

If size counts, DELL counts. It serves a huge range of the computer market, from enterprise-level servers down to laptops, from giant corporations down to schoolkids.

With average volume of 15.2 million shares, it is a supremely liquid trade. Institutional ownership stands at 69%, a bit low for a behemoth. Perhaps money managers are still a bit skeptical of the reinvention talk.

DELL's return on equity is 47% -- growth stock territory. It's financing its reinvention through borrowing, with a debt/equity ratio of 0.95, which is far higher than I like.

The stock is cheap, like something you would pick up at the local thrift store, with a price to sales ratio of 0.46. That means less than half a dollar in stock gives ownership of a dollar in sales. I like that a lot, but with the caveat that cheap stocks are usually cheap for a reason.

DELL's liquidity comes with a full suite of options, with strike prices $1 apart, narrow bid/ask spreads, and lots of open interest.

Earnings are scheduled for Feb. 21.

Decision for my account: The triangle breakout combined with the high liquidity and analyst happy-talk makes DELL very attractive. The high debt and the fact that the price has been swinging sideways since the summer of 2009 are troubling. I considered opening a stock position, suitable as a basis for for selling covered calls. But present call premiums make the return too low. 


As an alternative, I've sold February bull put spreads, short the $16 strike and long the $15 strike, which is profitable down to around $15.73. The spread limits upside gains but also downside losses.


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.







DVAX: A Speculative Play

Dynavax Technologies Corp. (DVAX) is a Berkeley, Calif.-based drug company whose research focuses on asthma, anti-inflammatories and autoimmune diseases. It has the volume of an up-and-comer -- 1.4 million shares a day on average -- but the price of  garage project -- under $4 a share.

I picked DVAX as the best bull chart out of 39 added today to Zacks top rankings, which derive mainly on earnings estimates. (See my essay "10,000 Charts" for a description of my screening method.)

The runners up all had good charts, and my final pick is frankly way open for debate. It was a very tough call. What finally hooked me on DVAX was the rising volume during the recent price rise that peaked last week.

The runners up were EXR in 2nd place, HUM in 3rd and DELL in 4th. (If I think of liquidity and tradeability, of course, DELL wins hands down.)

DVAX hit rock bottom in November 2008 at 15¢ a share, in  the depths of the crash that followed the collapse of capitalist finance. It has since recovered steadily, with the exception of a downward correction from January into October 2011.

The price began its most recent rise on Oct. 18, from a low of $2.27, and pushed up to a peak of $3.83 on Jan. 12. (The stock's all-time high is $10.66 in November 2006, also known as the "good old days".)

Since the most recent high, last week, the price has declined for two days running -- lower highs and lower lows, hitting $3.51 in the first hour of trading before reclaiming about half of its lost ground and marking time through the next four hours. (I'm writing at about 2 p.m. Eastern.)

Put it together, and DVAX has a classic bullish chart: Steady higher highs and lows over an extended period, with corrections that are proportional to the rise.

What I hate to see most in a chart is choppiness during corrections, as bulls and bears battle viciously for control. That pattern lacks conviction. I much prefer to see a chart that smoothly declines from a high, since it shows a much broader consensus, and therefore more traders will be satisfied sooner that the correction has done its work.

DVAX has return on equity that -- well, the sort of return on equity some of my younger cousins might get with their chemistry set in the garage. The most recent ROE was minus 200%. So for fundamentalists, this is a speculative play. Warren Buffet would throw up his hands in horror at the thought of putting one thin dime in DVAX.

Debt/equity is less horrifying, at 0.34, but it's still a fairly hefty load for a company to carry.

Despite those bad numbers, institutional ownership stands at 71%. So either some very smart money managers see promise in DVAX, or there has been a resurgence of faith-based trading.

Stock options are not an option when a price is this low. And there are in fact only three strike prices available, although with surprisingly high, 3-figure open interest.

The next earnings announcement is March 7.

Decision for my account: I won't consider opening a position in DVAX until the price breaks above last week's high, $3.83. Were I to open a position, I would buy shares and squirrel them away in my hope chest, rather than trading options.



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.


Friday, January 13, 2012

The Week Ahead: Prices

Next week is a short one for U.S.  because of Monday's holiday in honor of Dr. Martin Luther King.

In the U.S., both stock and bond markets will be closed, along with exchanges for futures and options. However, markets will be open as usual in London, Tokyo and Sydney. So American traders will need to pay attention to the currency markets on Monday.

During the truncated week, the U.S. will have a full platter of significant economic reports  to motivate the market.

The theme of the week is prices -- inflation if they rise, deflation if they fall, stagflation (?) if they fail to go anywhere at all.

Producer prices will be released Wednesday at 8:30 a.m. Eastern, followed by consumer prices on Thursday, same time.

Also out,

Tuesday, The Empire State manufacturing survey, for New York, at 10:30 a.m.

Wednesday, Treasury international capital at 9 a.m. , industrial production at 9:15 a.m. and the housing market index at 10 a.m.

Thursday, Housing starts and weekly jobless claims at 8:30 a.m., the Philadelphia Fed survey covering the mid-Atlantic region at 10 a.m.,  and natural gas and petroleum inventories at 10:30 a.m. and 11 a.m. respectively.

Friday, Existing home sales at 10 a.m.


Practical trading: By my rules, as of Tuesday I can trade February vertical, calendar, diagonal and butterfly spreads, iron condors and covered calls, and April singles and straddles. Of course, shares are good at any time.




GPC: After the Gap

Genuine Part Co. (GPC) is where you go when things break down and you need replacement parts, be it on your car, in your office, or on your industrial assembly line. So GPC makes more money when people and companies, reluctant to replace big-ticket items entirely, stretch them out to get a few more years of use.

From a story standpoint, if you expect a rapid recovery from the recent recession and a rise in durable goods purchases, then GPC is bad play. If you expect things to creep along in the doldrums for a few more years, then GPC will look fairly good.

The chart shows that GPC has been in a steady rise, from $24.93, since early March 2009, interrupted only by a period of sideways retrenchment from February to October 2011.

The most recent leg up began Oct. 18, 2011, at $53.60, up to a high of $63.31 this week, on Jan. 10. Since the peak the price has moved sideways for three days.

I selected GPC using a bracket on the 20 new additions made today to Zacks list of #1 ranked stocks. (See my essay "10,000 Charts" for a discussion of how I use brackets in stock selection.) The rest of the final four were TNB in 2nd place, AME in 3rd and TESS in 4th.

GPC's chart stood out because of its clear break, via an upside gap, above resistance, despite this week's ensuing stall. An intra-day decline, quickly retraced, on both Jan. 12 and Jan. 13 reached down, and covered the gap, increasing odds of further rise above the present micro-level congestion.

(I'm referring to the market lore that prices, after an upside gap, will drop down and "fill" the middle of the gap.)

However, what follows the gap is a puzzle.

The last three days of trading have shown lower highs, and the last two days reached lower lows than did the first day of the series. That's troubling to any expectations I might have for a breakout above $63.31.

The hourly chart over those two days shows a series of lower highs and more-or-less sideways lows, like a descending-triangle wannabe.

So it's a question of where I, as a trader, put the significance amid this contradictory evidence -- on the rise from mid-October? Or on the declining correction from this week?

This ambiguity is typical of today's bracket. Most of the 20 stocks had charts ranging from ambiguous down to bad, so if GPC is the pick of the litter, it was a litter filled with runts.

Financially, GPC is a fundamentalist's dream, with return on equity of 19% and a very low debt/equity ratio of 0.09.

And the price is cheap -- 80¢ of stock will buy a dollar's worth of sales. A bargain.

Institutional ownership is 73%, significant but not overly high. Perhaps it is the sector -- replacement parts doesn't have a cutting-edge image. Perhaps the cheap price is leading Big Money to say, "Stocks are cheap for a reason."

The stock is quite liquid, with average volume of 711,000 shares.

The selection of option strike prices isn't especially large -- only 10 strikes, $5 apart, for February, and the bid/ask spread isn't outrageously high, at $3.00/$3.70 for the nearest in-the-money call.

But open interest is better than on many stocks trading under a million shares, exceeding 1,000 contracts on three call strikes and exceeding 300 on three put strikes.

GPC's next earnings announcement is Feb. 21 before the open. The stock will next go ex-dividend in early March; the last quarterly payout was 45¢.

Decision for my account: I'm passing on GPC at this point. The lower highs and lower lows on the three-day micro-correction lead me to conclude that the next move could be in either direction. I'll reconsider this decision if the price breaks above $63.31, thereby setting a higher high, and accompanies that breakout with a higher low.


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.

Thursday, January 12, 2012

VAL's Blue Sky Flight

Minneapolis-based Valspar Corp. (VAL) is world's sixth-largest manufacturer of paints and other coatings. As such, it is a fine example of a sector that lies behind a broad array of industrial and consumer products. As the world's economy recovers (And it will! It will!), the recovery will create an environment where VAL can profit.

The chart drew my attention because of the steadiness of its rise.

The price began its upswing in early August 2011, at $27.44, and peaked today at (so far) $41.63. The price has had corrections within that five-month span, but even the corrections have had an upward tilt.

The most recent leg up began Dec. 15 at $36.17.

I chose VAL using a bracket of 16 stocks selected at random from a universe of 67 issues -- the new additions over the last three days to the Zacks #1 list. (See my essay "10,000 Charts" for a description of how I use brackets to compare charts.)

IHS came in 2nd in the bracket, CRUS was 3rd and XOMA was 4th.

The case for VAL's chart was helped by the fact that, on the weekly chart, VAL has broken clear this week of the previous highest high of $40.60, set in early April 2011. This puts the stock into blue-sky territory, as it has never before traded at these levels.

I must confess, I have a huge weakness for blue sky stocks. There is no upside resistance, and I think that fact increases  the odds in favor of a profitable trade.

Zacks has mixed financials. The return on equity is 17% -- on the high side, although below growth-stock territory -- but the debt/equity ratio is 0.56, which is a bit more debt than I like to see.

The debt isn't a deal-breaker, however. Interest rates are low, and the company has taken advantage of that to do some acquisitions abroad, as well as to sell some of its own assets. So as long as the money is being put to uses that will grow the bottom line, what's to worry.

Institutional ownership is 72%, so the big money, although not wildly enthusiastic, doesn't seem to be afraid of VAL's prospects.

The average volume of 684,000 shares provides good liquidity, but that hasn't translated into a fine selection of options, and that poor inventory limits the things that a creative trader can do to increase profits.

There are just eight strike prices, $5 apart, for February. The only strike with large open interest -- 1,035 contracts -- is the just in-the-money call options, suggesting that traders expect the price to rise and are buying calls for some leverage as they go along for the ride.

The spread is on the wide side -- 75¢ for the nearest in-the-money call.

On the calendar -- VAL announces earnings on Feb. 14, before the open, and the next ex-dividend date isn't expected until spring.

Decision for my account: I bought shares in VAL today. I decided not to do options because of the limited selection, a rather wide spread, and the concentration of open-interest in a single call strike. If the stock heads down, there will be a panic out of those calls, and no one -- NO ONE -- will want to buy them.



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.