Friday, June 29, 2012

CERN: Medical infotech

Cerner Corp. (CERN) make information technology systems hospitals and other medical organizations. The Kansas City, Missouri company's business plan is to provide complete solutions that encompasses medical records, physician entry of instructions for patient care and financial information.

Medical treatment has long been backward when it comes to information. Records, even in the present century, were kept on paper and plastic x-ray film. Information was compartmentalized so that changing physicians meant a loss of information. That happened to me when I moved from Washington, D.C. to Portland, Oregon as recently as 2007.

Cerner's job is to put an end to information stored in separate silos and make it easily available where it's needed. The company is creating a new environment of highly mobile medinfotech.

Such economies resulting from easy creation of and access to information is an element of the health care reforms that the United States is presently implementing

Unlike its larger competitor, McKesson Corp. (MCK), Cerner has no non-technology sources of income to speak of. It is a pure medinfotech play.

CERN gapped up this morning by 3.3%, due mainly, I think, to the eurozone heads of government reaching debt-crisis agreements overnight. The Supreme Court's ruling on Thursday upholding President Obama's passed with barely a ripple on the chart.

The pattern on CERN's chart has been one of sudden moves up followed by partial retracements and long, sideways pauses. The most recent bump up began June 12 from $77.87. It peaked June 19 at $88.32 -- an all-time high -- before falling to a low on Thursday of $76.52. (The previous lower low was $75.57 on June 1, so it was a substantial retracement.)

On the weekly chart, the price has been on the rise since late 2008 with only two major pullbacks.

I would call CERN a momentum play, yet it's not one that analysts are overly excited about. The analyst enthusiasm index at 18%, down from 22% a month ago. This is not a stock where the gang stands around the water cooler saying, "Hey! How about that CERN!!"

(My enthusiasm index gives positive weight to Strong Buy recommendations, and negative to Holds, Sells and Strong Sells. Simple Buys are ignored with a yawn.)

CERN drew my interest this morning because it landed on the Zacks top-buy list. Zacks each day makes public a handful of its new top buys, while reserving most of them for subscribers only. CERN was among the public batch. The Zacks analyst report is here. I haven't read it in order to guarantee that my analysis is independent of theirs.

Cerner reports return on equity of 15% with a low level of long-term debt amounting to only 6% of equity.


Earnings have rising a little each quarter since the 2nd quarter of 2011. The exception is the most recent quarter, which was down a penny from the quarter before. Cerner has shown an upside earnings surprise each of the past 11 quarters.

Institutions own 80% of shares and have bid up the price to a high level. It takes $5.65 in shares to control a dollar in sales.

On average, CERN trades 2.1 million shares a day, enough to support a good selection of options strike prices and open interest with fairly narrow bid/ask spreads.

Implied volatility stands at 35% in the upper half of the six-month range. It rose from 28% on June 11, peaking Thursday at 37% before declining as a result of the upward gap.

Options are pricing in confidence that 68.2% of trades will fall between $77.27 and $85.23, for a maximum gain or loss of 5%. Option volume is running deep below its five-day moving average, with call activity having a 2:1 edge over puts.

The price is well above the five-day fair price zone, which is not surprising given the size of the upward gap. The fair price zone is one standard deviation either side of the most traded price over the past five days, which is $77.43. The zone ranges from $76.60 to $79.92 and encompasses 68.2% of trades.

The chart shows what may be developing into a new most traded price, post-gap, at $80.88.

Cerner next publishes earnings on July 30.

Decision for my account: I like CERN's chart and fundamentals -- and the story as well. But before opening a position I want to see what will happen after this morning's gap. A move of such magnitude is often followed by a retracement over the very short term. So I won't enter today, but I might next week.


Because of the long pauses after each CERN move, I would tend to play it as a diagonal spread or perhaps a short vertical spread, the sort of position that can profit from non-movement as well as movement.


A fall below $76.52 would invalidate the near-term uptrend, and a rise above $88.32 would validate it. If the rise continues, there is a lot of room for profit between the present level -- about $81.20 -- and major resistance, amounting to 9%.


A move above $82 would suggest that the uptrend is continuing. An upward leap of the fair-trade zone, perhaps to being centered on $80.88, would also suggest that the time had come to open a bull position.


But for now, I'll wait and see.


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, June 28, 2012

UNH: Thanks, Supreme Court!

UnitedHealth Group Inc. (UNH) is the largest health-insurance provider in the United States. The Minnetonka, Minnesota company serves 75 million people.

The U.S. Supreme Court today announced an opinion upholding President Obama's reform of the American health-care system, including a requirement that most Americans buy health insurance coverage.

I want to analyze one of the major insurance providers as a baseline for reference in later analyses. I'm curious how these companies will fare under the Affordable Care Act, which expands their potential markets a great deal.

Truth be told, in my opinion, UnitedHealth should be sending a big thank-you letter to the five justices who voted to uphold the law. I think the reforms will prove to be very profitable for the health-insurance companies.

The UNH chart, however, isn't really showing the love.

On the chart, UNH has been in a pattern that can be interpreted as sideways with a failed breakout, or, alternatively, as a very shallow uptrend.

The pattern began with a rise on March 26 from $53.86, hit a high of $59.61 on April 3 and another high of $59.71 on April 20, before falling to $53.78 and then rising again to a pattern high of $60.75 on June 19. It has since retraced and is now trading at around $58.60.

So while it's true that each high since late March has been a higher high, none has been much of a gain over one before, and although the one swing low was a higher low, it wasn't higher by much.

If this is an uptrend, it is a fairly sorry specimen of the breed.

UNH was hit hard by the recession, dropping to $14.51. The price has only recently exceeded the immediate pre-recession high of $59.46 at the end of 2007, although it has yet to match the all-time high of $64.61 attained in late 2005.

Very short-term traders in UNH did not take the Supreme Court decision calmly. The price was at $59.02 immediately before the announcement, and in the ensuing 10 minutes swung between a low of $55.34 and a high of $60.50, a 9% range and about four times the average daily trading range.

The move was of no significance, although it was amusing to watch.

UnitedHealth reports return on equity of 19%, just below my definition of the growth stock. But that achievement is marred by a long-term debt level that is higher than I like, amounting to 45% of equity.

Earnings levels have been fairly stable from 2011 onward. Each quarter has been profitable, and all have shown upside earnings surprises.

Institutions own 87% of shares, yet the price is cheap. It takes just 59 cents in shares to contorl a dollar in sales.

UnitedHealth's analyst enthusiasm index is 53%, up from 47% a month ago. The index gives positive weight to Strong Buy recommendation, ignores Buys, and gives negative weight to Holds, Sells and Strong Sells.

UNH on average trades 7.3 million shares a day, sufficient to support a good selection of option strike prices with very high open interest and narrow bid/ask spreads.

Implied volatility stands at 31%, just below the midpoint, after having fallen dramatically in one day from 42%. Options are pricing in confidence that 68.2% of trades will fall between $56.28 and $61.30 over the next month, for a gain or loss of 4%.

Option volume is running double the five-day moving average for calls and nearly triple the MA5 for puts. There is a lot of speculation in UNH at this point. I don't normally seek out stories behind technical formations, but I wonder how much of today's options action is tied solely to the Supreme Court decision and is therefore extremely transient.

UNH is trading in the upper half of the fair price range, which encompasses 68.2% of trades surrounding the most traded price, $58.52. The range extends from $57.64 to $59.58.

The company next publishes earnings on July 19. The stock goes ex-dividend in September for a quarterly payout yielding 1.45% annualized.

Decision for my account: I've owned a diagonal spread on UNH since mid-May, an appropriate play for a stock that's going nowhere but with a slight upward bias. The spread is hedged by design, so I don't have a stop/loss point.


If I were putting on a bull position now, I would want to see a decisive break above $60.75. 


Wednesday and today have been volatile intraday but in each case has closed just below the opening price. They are, at this writing (2 p.m. Eastern) very near to being spinning tops on the candlestick chart, a hesitation pattern.


Even very near term, then, there is no trend, just a balanced battle between bulls and bears.


I considered entry upon a fall to and reversal from the level of the nearest low (excluding today's daytrader craziness), which is $57.23. But I've rejected that. The price is at the upper levels of the trading range since March, and I would want to see an uptrend established before opening a bull position.


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, June 27, 2012

CVX: Bubbling up

Oil and the companies that exploit it have been on the decline since March. Oil prices don't move for simple reasons. The petroleum market has more moving parts than most. The charts, however, tell me that it's time to take a look at this sector.

Light sweet crude futures peaked March 1 at $110.55 and have fallen fairly steadily down to a low of $77.56 on June 22.

That's the background, but my shtik is stocks and their options, so I'll analyze a specific company: Chevron Corp. (CVX), the second-largest U.S. based oil and gas company and the fifth-largest globally.

The company, headquartered in San Ramon, California, is active in more than 180 companies. Its operations cover the energy sector -- oil, gas, geothermal, biofuels.

I chose Chevron over its larger U.S. competitor, ExxonMobil (XOM), based on analyst enthusiasm. My enthusiasm index for XOM is 100%, and for CVX, it is 69%. CVX has room to grow in the affections of analysts. They are already totally head over heels in love in XOM.

(The enthusiasm index gives positive weight to Strong Buy recommendations, and negative to Hold, Sell and Strong Sell. Buy recommendations are ignored.)

The CVX chart generally tracks that of crude futures. The price hit a swing high of  $112.28 on March 14, and then stair-stepped down to a low of $95.73 on June 4. It has since set a high within a new upswing, followed by a higher low, and is now bubbling up in the second day of a rise that will set a higher high if it moves beyond $104.65.

The stock is now trading at $102.50 (as of this writing), so there is capacity for a 2.1% gain before the price hits resistance.

Longer term, CVX has been moving sideways since February 2011, with the trade segmented into several levels. The most recent has very roughly $96 as a floor and $110 as a ceiling. The floor could also be set at $98. There are some ambiguities in this chart.

Focusing back on the current leg, though, the key lower level is $98.17. A fall below would eliminate the possibility for now of a new uptrend and destroy the rationale for a bullish position.

Chevron has return on equity of 23%, growth stock levels, with extremely low long-term debt of only 7% of equity. Institutions own 62% of shares, and the price is discounted so that it takes only 78 cents in shares to control a dollar in sales.

In 2010 and 2011 earnings accelerated into the 2nd quarter and then fall off. The 1st quarter of this year is consistent with that pattern. Comparing current quarters to the prior quarters, Chevron has seen a steady rise in earnings.

All of the past 11 quarters have seen earnings surprises, three of them to the downside.

CVX on average trades 8.1 million shares a day, sufficient to support a good selection of option strike prices with high open interest and narrow bid/ask sperads.

Implied volatility stands at 24%, about mid-way through the six-month range. Options are pricing in confidence that 68.2% of trades will fall between $99.16 and $105.90 over the next month.

Both calls and puts are showing volume well below their 5-day moving averages, with the activity tilted slightly toward calls.

The price is at the high end of the fair-trade range based on the last five days of trading. The range encompasses 68.2% of trades surrounding the most traded price, $100.75, and stretches from $102.42 down to $98.24.

Chevron next publishes earnings on July 26. it goes ex-dividend in August for a quarterly payout yielding 3.51% annualized.

Decision for my account: A chart moving up while 2% below resistance gives some decent chances of profit even if there is no breakout. It's a short term trade, so I'm looking at either single options or spreads. I'm not terribly confident that there will be a breakout, so I'm inclined toward a hedged position.

I've opened a bull put spread expiring in July, short the $100 put and long the $97.5 put. This gives me  about a 28% profit over the amount risked, and the position will be profitable at expiration down to around $99.40.

If I were doing an unhedged postion, I would set the stop/loss at $98.16, a penny below the lower low level that would negate any possible uptrend. That's about double the $2.02 average intra-day movement of the price (the Wilder Average True Range indicator).


Since a bull put spread is already hedged, I won't put on a formal stop/loss but will be watching that level closely.


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, June 26, 2012

FB: Testing boundaries

Facebook Inc. (FB) is testing the boundaries of the $33.21 high set four days into trading, the first higher high after the three-day plummet from its $45 IPO opening down to its $31 third-day close, a decline of 31% that no doubt left many people unhappy.

In looking at FB, I consider the 4th day of trading to be the first meaningful day. The first three days were distorted by computer problems at Nasdaq, hurried price support from the IPO managers, and an "OMG! Fire!!" rush to the exits by the trendy get-rich-quick crowd.

What has happened since May 23 has been the establishment by FB of a trading range. From the $33.21 high, the price declined in an orderly fashion down to a low of $25.52 on June 6.

It has since climbed back above $33, and the last three days (including today so far) it has set highs of $33.45, $33.02 and $33.44.


What this means for me as a trader is that FB began an uptrend and has now hit resistance. A decisive break above that resistance (call it $34) means FB is still in an uptrend. A retreat means a sideways trend.

FB is trading above the fair-price range of the past five days. That range contains 68.2% of trades surrounding the most traded price, $31.77.




I give analysts a 20% enthusiasm index, an analytical method that assigns positive weight to Strong Buy recommendations, negative to Hold, Sell and Strong Sell, and ignores Buy.

Decision for my account: I'm still interested in FB because I think the price will rise significantly over time. I don't intend to open an unhedged bull position until there's an upside breakout above $34. I would also consider a hedged bull position, such as a diagonal or covered call, if I could structure it so that my initial basis was $25.50 or lower.

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.

IGT: Betting on a pennant

International Game Technology (IGT) creates, builds and sells games and gaming gear of all sorts, from something played on a the Internet to the boxy things you might see in a casino. Which makes sense for a company headquartered in Las Vegas, Nevada.

The common thread is gambling, which puts the company, to a great extent, at the mercy of state legislatures and the Congress. With the culture having become far friendlier toward gaming in recent decades, odds are that IGT's prospects won't be scuttled by the house.

But it is important to remember that when IGT plays, the house is the governments, and they control the game. If their view of gaming turns sour, so do IGT's odds of winning.

IGT has been on a long, gentle, zig-zagging price slide since September 2009. It is presently in a leg up from the low of $13.12 set June 4 and is trading around $15.14. The previous leg fell from $17.37, a price hit on March 27, and if its past price pattern is prolog, then the current leg up will fall short of that level by a certain amount.

Based on a two-week pause in the decline, I'm betting on $16.60 or so as the main resistance for the uptrend.

However, the uptrend is presently in a pause, a pennant pattern that has so far lasted eight trading days, following a 5.7% opening gap on June 14 that was followed by a 14.5% intra-day rise. A pennant is a continuation pattern, suggesting that the uptrend will continue.

A break below $14.73 would invalidate the pennant pattern, although some chart-readers would allow a fall below $14.50 before getting worried. A break above $15.40 would mean that the uptrend had begun again. A break above $17.37 would suggest the possibility that the downtrend from 2009 was ending.

I'm interested in IGT because of its enthusiasm index, which stands at 11%. That shows analysts are a bit excited about this stock, although not so much that everyone has long ago put their chips on it.

My enthusiasm index gives positive weight to Strong Buy recommendations, negative to Hold, Sell and Strong Sell, and ignores Buy.

International Game Technology has return on equity of 18%, a bit below growth stock territory, and a high level of long-term debt, amounting to 110% of equity.

Institutions own 81% of shares, and have bid up the price so that it takes $2.21 in shares to control a dollar in sales.

Earnings accelerated through most of 2011, faltering in the 4th quarter, which is historically a weak period for the company, recovering during the historically strong 1st quarter.

The company hasn't seen a quarterly loss going to back to at least 2010. It has seen three quarterly downside earnings surprises, two of them in 4th quarters and one in a 2nd quarter. The other quarters have all seen upside surprises.

The only thing wrong with this picture is the long-term debt, and that's more a concern for people who intend to stay in an IGT position for the long term. That's not what I propose for my account.

IGT on average trades 5.9 million shars a day, sufficient to support an outstanding selection of option strike prices with high open interest (in the front month at least) and narrow bid/ask spreads.

Implied volatility stands at 37%, in the top half of the six-month range, and has been rising steadily since early June. Options are pricing in confidence that 68.2% of trades ove rthe next month will fall between $14.35 and $15.91.

Option volume is well below the five-day moving average, with puts further down than calls. I would expect that during a pennant formation or some other holding pattern.

The price is within the upper half of the fair trade zone for the last five days, which ranges from $14.93 to $15.16. Those prices encompass 68.2% of trades measured from the post traded price of the period, $15.09. That suggests that the stock is fairly priced but with traders pushing it higher over the very near term.

The company next publishes earnings on July 25. It goes ex-dividend in September for a quarterly payout yielding 1.59% annualized.

Decision for my account: One aspect of pennant lore in charting is that when the breakout comes, it will be explosive. Given that, I think I would to lay on a very simple position that didn't limit my upside. Shares are one possibility, but that provides no leverage. Long call options are leveraged and are my choice for this trade. 


I've opened a position consisting of $14 calls expiring in October. The chart/based stop/loss levels are based on the pennant, $14.72 or $14.49, depending upon which level the trader thinks will beak the pennant. I'm inclined for my account to the $14.49 level.

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, June 25, 2012

MSFT: The next Apple?

Is Microsoft the new Apple? That was basically the question that drove the news coverage after Microsft, on June 18, announced its first entry into the tablet market dominated by Apple's iPad.

Whether the Microsoft Surface will indeed carve out a viable share of that market remains to be seen. The announcement does, I think, make it worthwhile to take a look at this staid and rather unexciting tech giant.

Microsoft Corp. (MSFT) needs no introduction to anyone. It is as ubiquitous to computing as air is to lungs and water to gills.

The Redmond, Washington company is like the big-box retailer Wal-Mart in a way: Neither is particularly innovative at this stage of their corporate lives, but when they decide to do something new, it's like the shifting of tectonic plates: Massive movements that impact everything.

Both companies are very big and very, very rich.

MSFT on the chart hit a milestone today: It has given back nearly all of the 4% bump it got from the Surface announcement.

This is a stock, in fact, that has gone nowhere for a dozen years. It has been trading within a range from roughly $22 to $32, with the occasional break above and below that range. MSFT is a swing trader's dream.

At present MSFT is coming down from one of its upside breakout attempts, having peaked at $32.95 on March 16 after a run up from $30.30 beginning in January.

The retracement brought it down to $28.32 on June 4, and the price subsequently rose to $31.14 on June 21 before beginning the present decline, which is now in its third day.

The present decline has fallen insufficiently to break the uptrend from January, and the smaller scale uptrend from early June also remains intact. However, to break free of the downtrend that followed the March breakout would require a move back above $32.85.

All of which is very confusing. I look at it this way: From small scale to large, MSFT is in the third day of a downtrend within a larger uptrend lasting weeks within a downtrend lasting months within an uptrend lasting half a year within a sideways trend spanning more than a decade.

On the books, Microsoft looks curiously like a growth stock, the opposite of the stagnation shown on its chart.

It has return on equity of 38%, with low long-term debt amounting to just 17% of equity.

Institutions own 65% of shares, which is a bit on the lower side, yet the price has been bid up so that it takes $3.53 in shares to control a dollar in sales. Based on the financials, this is an expensive stock.

The stock has been profitable for at least the last 11 quarters, with an upside earnings surprise in each. Earnings growth accelerated through 2010 but from 2011 onward has been more in a holding pattern.

I give Microsoft an enthusiasm index of 27% among analysts, using a system that gives positive weight to Strong Buy recommendations, negative weight to Hold, Sell and Strong Sell recommendation, and ignores Buy recommendations.


(Apple, by comparison, has an enthusiasm index of 94%.)

MSFT on average trades 48.3 million shares a day. It has, no surprise, an awesome selection of option strike prices with very narrow bid/ask spreads.

Implied volatility stands at 29%, in the upper half of the six-month range. Options are pricing in confidence that 68.2% of trades over the next month will fall between $28.60 and $30.98.

In terms of current valuation, both calls and puts have volume above their five-day moving average, skewed toward the call side. That means that there is active interest in trading.

MSFT is trading below the range containing 68.2% of transaction prices over the last five days, suggesting that it is relatively inexpensive.

The company next publishes earnings on July 19. It goes ex-dividend on Aug. 14 for a quarterly payout yielding 2.69% annualized.

Decision for my account: I like MSFT on the financials and the business model, and obviously for its dominance of its market. The problem is the price is going nowhere. That problem impacts strategy choice, not the decision to open a position.


I could see playing MSFT as a diagonal spread, continually lowering the basis by selling front month calls against long back month calls. Or as a covered call, for traders wanting to forego the leverage options (which reduces risk) in in favor of capturing the dividend. A good swing trader to could play it as a directional play, once the direction becomes clear.


For my own account, I've opened a diagonal spread, long the Januay 27 calls and short the July 31 calls.

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, June 24, 2012

The Week Ahead (Updated)

Durable goods, the gross domestic product, and personal income and spending -- this is a heavyweight week for econ reports. All three will be released at 8:30 a.m. Eastern on their respective days.

The big market mover of the week, however, isn't an econ report at all. The Supreme Court issues its decision on President Obama's health care reform law at 10 a.m. on Thursday. Since health care costs affect every business in the country, not to mention ever household, their ruling will have an impact.

(On my personal Facebook page, I've predicted a 6-3 ruling to uphold the reform law, with Justice Kennedy and Chief Justice Roberts voting in the majority. Wise trader that I try to be, however, I haven't put any on money on it. See my reasoning at the end of this post.)

[June 28: The actual vote was 5-4 to uphold. I got the outcome right, but not the vote count. So I'll forego a jubilation dance in the end zone. Still, given the fact that the punditocracy was universally forecasting that the law would be struck down, I'm pretty happy with my call.]

Durable goods, on Wednesday, are orders for big-ticket items. In many ways this is a measure of confidence, because people and businesses don't make such major commitments unless they're sure they can spare the money.

The GDP, out Thursday, gives the final, presumably most accurate, look at the 1st quarter numbers. A surprise here will be impactful, since in the normal course of things it won't change much from last month's release.

Friday's personal income and outlays, from which the savings rate is calculated, answers two all-important questions for economic growth: Are we willing to shop 'til we drop, and can we afford to do it?

Leading indicators:

The weekly report on initial claims for unemployment compensation is out Thursday at 8:30 a.m.

The index of consumer expectations, part of the University of Michigan consumer sentiment report, will be released Friday at 9:55 a.m.

Traders should also keep an eye on these financial leading indicators: The M2 money supply, out Thursday at 4:30 p.m. from the Federal Reserve, and two reported continually during market hours: The S&P 500 index and the interest rate spread between 10-year Treasuries and the federal funds rate.

Other reports of interest:

Monday: New home sales, a smaller share of the market than existing homes, at 10 a.m., and the Dallas Federal Reserve Bank's survey of Texas manufacturers at 10:30 a.m.

Tuesday: The S&P Case-Shiller home price index in 20 metropolitan areas at 9 a.m., and the Conference  Board's consumer confidence report at 10 a.m.

Wednesday: Pending home sales -- signed but not yet closed -- at 10 a.m., and petroleum inventories at 10:30 a.m.

Friday: The Chicago-area purchasing managers index, from the Chicago Institute of Supply Management, at 9:45 a.m.

Also, one of my favorites, although no one really pays attention to it. The State investor confidence index, from the Boston financial company State Street Global Markets, tracks levels of risk in investment portfolios, and from that derives a number for investor confidence. It's out Tuesday at 10 a.m.

I've never seen the investor confidence index reported by any news outlets, but you can find it here, straight from State Street.

Practical trading:

By my rules, as of Monday I can trade July vertical and butterfly spreads along with iron condors,  and October single options and straddles. The short legs of my diagonal and calendar spreads will expire in July. Of course, shares are good at any time.

Good trading!

Health care reform: Here's the reasoning behind my guess on how the Supreme Court will rule on health care reform.

The justices aren't shy about overturning laws, but they hate to be openly partisan. And nothing in recent history is more partisan than the health-care reform law.

They will take partisan acts with strong constitutional backing, as with the Citizens United case that removed restrictions on political campaign spending by corporations. There was a strong 1st Amendment argument to be made in that case.

No such strong constitutional provision is available in connection with health-care reform.

Also, today's 5-3 ruling on the Arizona immigration laws may well be a sneak preview of the health-care reform decision. (It would have been 6-3  but Justice Kagan recused herself.) Both cases turn on long-stranding federal powers derived from the constitution: Regulation of immigration in the Arizona case and regulation of interstate commerce in the health care reform case.

In Arizona, the court came down firmly on the side of federal rights. I think they'll do the same in health care reform.

Friday, June 22, 2012

LCC: Breakout chart

US Airways Group Inc. (LCC) is the world's 10th largest airline, measured by number of passengers carried. The Tempe, Arizona company has more than 3,100 flights daily to more than 200 destinations in the Americas, Europe and the Middle East.

LCC has been on the rise since November 2011, but the chart was ambiguous. My primary interpretation was that it was part of a large sideways structure dating back to the depths of the recession, with a ceiling of around $12.

This week LCC shattered the ceiling, although rather gently, and reached a swing high Thursday of $13.78. With that move, the chart can be interpreted as a long-term uptrend.

As I write, the price is $12.98, within the fair price range, which contains 68.2% of trades over the last five days surrounding the most-traded price of $12.72. There are also volume spikes between $13.39 and $13.48, indicating levels where both buyers and sellers see advantage in trading.

US Airways has a ridiculous return on equity of 276%, with an equally ridiculous long-term debt level amounting to 22 times equity.

Institutions own 90% of shares, which are priced at bargain basement levels: It takes only 16 cents in shares to control a dollar in sales.

Earnings are like a busy airport, with both take-offs and landings. Reviewing the last 11 quarters, it runs three losses, three profitable quarters, another loss, three profitables, and then a loss in the most recent quarter. Each quarter, whether profitable or not, showed an upside earnings surprise.

Anyone looking for earnings acceleration should search elsewhere.

LCC on average trades 9.4 million shares a day.

The options selection is excellent, with high open interest and narrow bid/ask spreads.

Implied volatility stands a 84%, in the lower half of the six-month range. Options pricing implies confidence that 68.2% of trades over the next month will fall between $11.46 and $14.50, for a gain or loss of 12%.

US Airways next publishes earnings on July 23.

Decision for my account: I've opened a bull position on LCC. I like the chart. The earnings pattern? Not so much. I don't want to hold LCC over an earnings announcement, so I've structured the position as a bull put spread expiring in July, short the $13 put and long the $10 put. This gets me out before earnings, and also puts me in a position that is profitable down to about $12.25. If the stock were to fall to that level, then the rationale behind the position would no longer be valid and I would want to close it.

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, June 21, 2012

Market fall: Not yet a rout, or even a plunge

After the close today we'll all be reading market stories abounding with words like "plunge" and "rout" (as the AP did in the story published about an hour before the market closed).

To put things in perspective (and as an exercise in chart reading) ...

The S&P 500 moved into a downtrend on April 2, falling from 1422.38 down to a low of 1266.74 on June 4.

The price then reversed, climbing to 1363.46 on June 19, breaking past the previous high in the stair-step down from April.

From June 19, the price reversed again, reaching a low today (so far) of 1328.85.

So, the index was in a downtrend from April into June, reversed in June and has now set a higher high, making it an uptrend.

To negate the uptrend, the price would need to fall below 1266.74 -- the price at the June 4 reversal. To confirm the uptrend, the price would need to break above the June 19 high of 1363.46.

So it's not a rout yet by any reasonable definition, and not really a plunge. It's a correction that so far has fallen about 35 points, or 2.5%.

The price in two days has fallen within the range of past price movements, since the index on average traverses about 19 points a day, or 38% in two days.

The S&P 500 may well become  a downtrend, and indeed a rout. But it hasn't yet.

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.

The Art of the Stop/Loss

Crack any book on trading, and you'll soon come across a statement that goes something like this: Set a stop/loss on your positions in order to limit your losses.

I've read that statement and its cousins so often that it has achieved the status of indisputable truth, like the falling of apples when dropped from leaning towers and the ethical strictures against coveting neighborly goods and spouses.

However, one lesson I've learned in thirty years of trading is that the indisputable must always be disputed. Could it be the authors of all those books on trading are wrong about stop/losses?

I've come to the subject as a result of a bad trade. I set a stop/loss too close to the entry price, it inevitably got taken out, and the trade was closed, for a small loss. I wrote about in my post-mortem here.


In that simple tale of a minor failed trade lies a host of assumptions: Stop/losses are necessary. There must be rules for setting them. When a stop/loss is taken out, it represents a failure because it creates a loss, a cost to the trader.


Stop/losses are necessary.


But are they? A stop/loss, after all, represents doubt in the trader's analysis. A stop/loss says, "Yes, I entered this trade, but I'm not real sure about it, so I'll fudge."


That strikes me as being a pusillanimous stance. If I'm uncertain of my analysis, why in the world would I open the position? Ought I not be confident that I've done my job right before committing my funds?


By that measure, a stop/loss is a symptom of weak analysis. It also points toward the evil of habit of trading just because that's what a trader does -- trading as an addiction, an illness that preys on all of us who love the drama, the uncertainty and the head rush of the markets. 

A stop/loss is also a means to avoid paying attention to a trade. The good trader will know at all times what the positions are doing. If the analysis was wrong wrong, then the trader will use judgment about whether the time has come to close the position.

A stop/loss can be represented as a judgment, true. But it's a judgment made days or weeks or months earlier. Trading is something that happens now, and it is in the Now that the best trading judgments are made. If I'm going to close a position, I need to do it based on current information, not on old information.

In the markets, sometimes five minutes ago can be old.

Argue though I might, it is a fact that stop/losses are a universal practice. And there are practical reasons for doing so. The main ones are speed and time.

Sometimes the markets can crash very quickly. The Flash Crash of 2010 comes to mind. And I have vivid memories of Black Monday in 1987. A stop/loss in either of those circumstances could have gotten me out of falling positions well before I could come to a decision and intervene.

In 2010, that would have played into a head fake, and I would probably have re-opened my positions the next day. In the case of 1987, a stop/loss would have spared me months of painful loss.

Less dramatically, a lot of traders work, and the boss takes an unfriendly attitude toward using company computers to trade on company time. Many in the worker-bee community place trades in the evening for execution at the market open. A stop/loss can be important toward safe-guarding a position when the trader can't trade for extraneous reasons (like mean bosses).

There are rules for setting stop/losses


A standard recommendation from trading coaches is to set the stop/loss at 3% below the entry price.

This is inevitably, and quickly, followed by the admonition that the trader must determine the level of potential loss that they can handle, a caveat that I find to be most unhelpful. I mean, for a lot of people, any loss is hard to handle. Others are willing to hold on to a stock and see it drop to zero before they're willing to part with it.

Essentially, the coach is saying, "Three percent, but don't hold me to it. Come up with your own rule."

If setting a stop/loss is a serious recommendation, then there ought to be a rule on setting it. And there isn't. Another recommendation I've seen is to set a 5% stop/loss. I've even seen 1% offered up on occasion.

Fixed percentages, of course, ignore differences behaviors among stocks.

Some stocks move in wide range each day, such as Netflix (NFLX), a $66.50 stock that has a daily average movement of $3.16, or 4.8%. Odds are good that a 3% stop/loss on NFLX will be hit, on average, every day.

Others move in narrower ranges, such as Johnson & Johnson (JNJ), a $66.27 stock that has a daily average movement of 78 cents, or 1.2%. A 3% stop/loss on JNJ would be far less likely to be taken out that that on NFLX.

An alternative to fixed percentages is to use the average daily movement to calculate the stop/loss. The Average True Range (ATR) gives a 10-day average movement. A stop/loss can be set as whatever multiple of the ATR the trader wants: Usually the ATR itself or double the ATR or for more leeway.

So in the case of NFLX, using the one ATR would produce a stop/loss of $63.64. For JNJ, that method would give a stop/loss of $65.49.

The most rational method, in my view, is to set the stop based on the trader's reasoning when entering the position. Generally, my reasoning goes something like this: The price is in an uptrend because it has broken above Level #1, and if it falls below Level #2, then it will no longer be in an uptrend.

Rationally, I would want to set my stop/loss at the point where the uptrend disappears, Level #2. This approach treats every position as a logical proposition. When events have proven the proposition to be false, then there is no longer justification for the trade and the position should be closed.

Another way of stating this method is to say that stop/losses should be set below support.

Perhaps using the price for the stop/loss is the wrong approach. There are many risks in life. When I'm driving a car, I have the risk of having an accident. I don't quickly stop my car and get out of it when I see the risks rise in heavy traffic. Instead, I carry collision insurance to mitigate the loss in case of an accident.

In trading, buying insurance on a position is called hedging. There are many ways to hedge, generally using stock options. The simplest is to buy a put option on a bull position, since it will gain money if the position loses. More complex positions, such as covered calls and option spreads of various sorts are nothing but hedges, intended to limit loss.

I've found as a trader that it's not difficult to judge the direction of a stock's movement. If I expect a stock to rise, it generally will. Eventually.

That "eventually" means that I'm horrible at guessing when that rise will occur. I count count that the times that I've opened a bull position, had it immediately start to fall the next day, closed the position for a loss, only to see it rise above my entry point.

That being the case, perhaps stop/losses are best set using the calendar. If I'm confident that stock will rise, by this argument, I ought to open my position and hold it for a fixed period of time -- a month or three months or a year, depending upon my time horizon. At the end of that period, I close the position, whatever the price.

A variant is to sell the position if it's unprofitable, but to hold it for a new period if it is making money. In any case, using this method I would sell in the middle of a period.

I've seen studies concluding that selling by the calendar, with a holding period of three months or so, is more profitable than relying on moving average crosses or other price-based strategies. (See page 143 of Way of the Turtle, a book about the trend-following Turtle Trading method. The book is well worth reading on many levels.)

Stop/losses are a failure when taken out


Any method used to protect a position from loss has costs. That's because any such method amounts to insurance, and insurance always carries a premium.

In the case of a simple stop/loss, the "premium" comes when the trade is stopped out below its entry level. The loss on the trade is the premium.

Of course, once the stock has moved away from the entry price in the direction of profit, then the trader will change the stop, making it less likely that it will produce a loss if taken out. That means free  insurance, always a good thing.


Hedges are never cost free. The cost of hedging a bull position limits on potential gains, as in covered calls and all spreads. Or it can be in the need to put up huge amounts of margin to ensure you can cover the hedge, as in a synthetic call or synthetic future. Or in the case of a put or call bought for insurance, it's the cost of buying those options.


The fixed period trade has "premium" similar to a price stop/loss. If the position is loss-making when the period ends, then that loss is the cost of insurance.


But is the cost of insurance a failure? Surely the premium paid for collision insurance on a car or life insurance represents prudence, not failure. It's a cost of living in an uncertain world. The same can be said for the various premiums used to mitigate loss in the markets.


No one could reasonably say that collision insurance failed if there's a crash, or life insurance failed when there's a death.


In those cases, there's a payoff, and in the case of a stop/loss that has been taken out, there is a payoff as well, in the form of losses not suffered because the stop/loss closed the position before greater damage could be done.


By that reasoning, when a stop/loss is taken out, it is an act of beauty and a tribute to the trader's forward-thinking prudence.


What I do in my account


I'm all over the map. For bullish options positions that gain value as they near expiration, such as covered calls and diagonal spreads, I tend to buy puts to insure the position and don't set price stop/losses. The options themselves have expiration dates that provide a fixed-term stop/loss for the position.

(Arguably, using puts to insure a hedged position with a fixed-term stop/loss -- an options expiration -- is overkill, and I'm considering discontinuing the practice on individual trades, instead buying deep-out-of-money puts on the S&P 500 index to insure against systemic risks.)

For option positions that are prone to time decay (the loss of value as the options near expiration) and also for stocks, I tend to set stop/losses based on the support levels -- my trade has a rationale based on the chart, and if the chart changes so as to invalidate my reasoning, then I close the position.

This can often be a very subjective process and lead to whipsaws. A chart has many levels of movement, from the slow and grand to the fast and miniscule. Selecting which level to trade is a subjective art.

As with everything in the markets, stop/losses are complex. There is no single "right" method in my opinion. What's important is that any method be selected after thinking through the various arguments, rather than simply accepting some else's word.

As a trader, I'm responsible for my trades. To accept someone else's "3% stop/loss" as gospel diminishes my responsibility.

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, June 20, 2012

ADM: Failed trade post-mortem

One rule of a successful trading game is to never let a failed trade go by without figuring out what went wrong.

My sideways position opened Thursday on Archer Daniel Midland Co. (ADM) within hours of its  hit the stop/loss level I had set when I opened the position. It was a spectacular failure on timing, although a damp firecracker on loss -- the iron condor position only cost me $23 per options contract, not counting trading commissions -- peanuts in comparison with the value of the position.

You can read my analysis of ADM, posted yesterday and updated with the position outcome, here. And a more comprehensive discussion of stop/loss methods, here.

But my focus in this discussion in on a specific trade: ADM.

So what went wrong?

My entry was $30.53 on the stock price. My stop/loss was $30.28 on the stock. I chose that level as being just below downside resistance on a half-hour chart.

The stock took that level out when it dropped to $29.33. It has since reversed and closed today at $29.88.

Here's what I think went wrong:

Error #1: I set the stop/loss on a half-hour chart, whose granularity is way too fine to filter out the normal jitterbugging of the markets.

Had I been using a chart with daily bars, I would have seen resistance points at $30.14, $29.32 (the low set the day before a downside gap), and $28.11.

Conclusion: My stop/losses on stock-based trades should always be set on a daily chart. The immediate price action is important, but the larger context is as well.

Error #2: The magnitude of the stop/loss was too small, and recognizably so by several criteria.

The stop/loss was a mere 25 cents below the entry price. This is on a stock whose daily trading range has been 67 cents wide on an average of the past couple of weeks. (I'm using the Wilder average true range -- ATR -- indicator for the calculation.

One ATR would have set the stop at $29.86, and it still would have been hit. A common practice is to use double the ATR, which would have set the stop at $29.19, preserving the position.

Moreover, an iron condor is not a day trade. It is intended to hang around for at least a few weeks in order to earn its profit. The implied volatility on trading day showed confidence that 68.2% of trades would occur between $28.32 and $32.74 over the next month. On that scale, $28.32 would have been an appropriate stop/loss.

Using a weekly time scale for the implied volatility, the stop loss would have been set at $29.47, and the position would have been taken out.

So I set the stop as though it was a day trade, and that was an inappropriate level of analysis for that position.

Error #3: I bought into a downtrend.


When I opened the position, ADM was trading at resistance set last April. The daily bar on trade day was down -- an intra-day downtrend.

I focused my attention on the resistance level, and failed to take the very near-term trend into account. In doing so, I broke one my rules: Never buy into a downtrend.

I would have done better to wait for a confirming intra-day uptrend before opening the position.

Here's what I think went right:

The stop/loss worked. It got me out of a position that was falling to a lower low, piercing the floor of a sideways trend and setting up a multi-day downtrend. Whether getting out was the right thing to do will seen in later trading. The price the day after the trade set a new lower low, but then retreated, although it still closed below the prior day's low. So it's a downtrend.

In summary:

The stock didn't do what I expected it to do. My stop/loss got me out with a very small loss. As a trader, I judge potential positions based on what's before my eyes. My crystal ball is broken and the dog ate my tarot cards.

I trade in the Now, and absent knowledge of the future, how I interpret the Now can sometimes be wrong in light of later events. This is the nature of the world and its interaction with the human mind.

I once had a wise trading coach tell me, "You lost money? So what. Did you follow your trading plan? Then the trade was a success. Pat yourself on the back and move on to the next trade."

I made one error in executing my trading plan -- listed as #3, above. I followed my plan in many other ways. So in my coach's eyes, my ADM position wouldn't be a total failure, and I think he would rank it as a partial success.

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.

FL: A value stock play

Foot Locker Inc. (FL) sells athletic shoes and clothing through 3,369 stores in the United States, Canada, Europe, Australia and New Zealand.

The New York City company's strategy is to site its retail outlets in malls, and I have certainly never seen an American mall without a Foot Locker. Malls and FL go together like love and marriage or peanut butter and jelly.

I'm looking at FL today because it was picked by the investment research company Zacks as its Value Stock of the Day, a high honor that Zacks makes available to non-subscribers as well as those who pay for premium access.

I haven't read the Zacks report yet so that my analysis can be independent. You can read the report here.

I'm not normally a value stock sort of trader. I'm a charts guy. I am, however, an eclectic trader. I never met a chart that wasn't worth reading, no matter what rationale brought it to my desk.

On the chart, Zacks ended a strong leg up from August 2011 by faltering last March. From that point the price moved sideways into May, dipped below the $28 level, and then gapped up and rose to a high of $33.29. It then corrected again, in a downtrending zig-zag that bottomed at $29.15 on June 18, and it has since traded mainly within the range set that day.

There are several overlapping trends at work here. The May correction ended by not breaking the uptrend, because it set a low higher than that bottom of the correction that began in March.

But it also internally counts as a clear downtrend, with a lower high and lower low in comparison with the May peak.

To complicate things more, of course, the rise from 2011 into March is part of a broader uptrend beginning with the recession bottom set in 2009, and the recent peak is at the ceiling of a sideways trend that has been in force for at least 20 years.
"Wait a bit, Tyek," Farad'n said. "There are wheels within wheels here." -- Children of Dune, by Frank Herbert. 
Charts are never simple. They're as complex as the courtly machinations of Herber's Dune universe.

Foot Locker has return on equity of 14%, below growth stock territory but still quite respectable. Long-term debt is a mere 6% of equity, a very low level.

Institutions own 92% of shares, and the price is below parity with sales. It takes only 78 cents in shares to control a dollar in sales.

Earnings tend to peak in the 2nd quarter -- athletic stuff tends to fly off the shelves in the spring. The last two 1st quarters have shown accelerating earnings.

Foot Locker has been profitable the past nine quarters, after some losses in the depths of the recession, and each of the nine has shown an upside earnings surprise.

On average, FL trades 2.2 million shares a day. This supports a wide selection of options with adequate open interest and fairly narrow bid/ask spreads.

Implied volatility stands at 32%, about the middle of the six-month range and has been stair-stepping lower since mid-May.

Options traders are pricing in confidence that 68.2% of trades will occur between $27.02 and $32.48 over the next month.

Nearer term, the stock is trading in the fair price range calculated on the basis of the last five market days. It's a fairly narrow range, from $29.48 to $29.98, because of a small sideways trend that kicked in last Thursday. The largest number of trades have occurred at $29.76.

Foot Locker next publishes earnings on Aug. 13. The stock goes ex-dividend July 11 for a quarterly payout yielding 2.24% annualized.

Decision for my account: I like FL as a bull play. The question is how best to play it. Because of the relative high dividend, and its proximity in time, I think that FL best goes as a covered call -- buying shares and selling at-the-money July calls against them. Selling the $29 call lowers the basis by $1.40 or so, which is a good thing. The 18 cent dividend lowers the basis a bit more. 


I'm convinced, and I opened a covered call position on FL a short time ago.

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, June 19, 2012

ADM: Swing play (updated)

Archer Daniels Midland Co. (ADM) a few years back promoted its business with the slogan "Supermarket to the World". That's not far off the mark. If its edible, then you can be fairly certain that the Decatur, Illinois company's 30,000 employees and 265 processing plants have a hand in it as part of ADM's global operations.

Our interest, however, is less in ADM's corn, cocoa and soy, and more in the chart. For ADM is one of the very few top-volume stocks in the Russell 1000 to be a) underpriced, and b) not gapping downward in free-fall as I run the charts today.

Despite all of the euro-angst and fiscal-cliff fears, the markets are all in all trading above the lower ranges of their historical levels, whether viewed for a week, or a month, or a year.

That's not to say that ADM hasn't dropped. The open this morning saw the price plummet from $31.39 down to $30.38, a 3% loss in just three hours.

The decline carried the price down to the low area of a sideways range that has been in effect since March. The level is a bit raggedy but $30.40 is close to the floor.

If it reverses, it has no serious daily-chart resistance until it hits $32.70, the most recent level of the range ceiling, for a 7% gain.

In other words, ADM at this point is a classic swing play -- buy at the floor and sell at the ceiling. Another approach would be to use a sideways strategy, such as an iron condor or a double diagonal spread, to lock in profits as long as it stays within the range -- call it $30 to $33.

I like it better as a directional play because the price is at the low end of the range. Were it at mid range, I would go for the iron condor.

I consider ADM to be underpriced because in the last 20 days of trading the greatest number of trades has occurred at $31.92.

One standard deviation from that level, containing 68.2% of trades, gives a fair-price range of $31.28 to $32.59. Now $30.41, ADM is at a level less likely to attract sellers.

ADM's trading pattern is complex, however. There are two other price/volume outliers, one at $31.26 and a second, smaller one at $30.77. Either could become a new sticking point if ADM should reverse and climb.

And it has begun to reverse, with prices rising within two half hours, with both setting higher highs. (I'm writing at about 1:30 p.m. Eastern)

Looking at today's trading only, the highest volume price is $30.70, with a fair price range between $30.29 and $30.86. So even within day-trader territory, ADM is priced below the most sought-after price.

Archer Daniels Midland has return on equity of 8%, making it a slow and steady performer, with debt higher than I like, at 56% of equity. Institutions own 71% of shares and the price is quite cheap -- it takes only 23 cents to control a dollar in sales.

Earnings for the most recent quarter were up sharply from the prior quarter, but all in all, the trend of earnings has been down from 2011 into 2012. The company has been profitable the last 12 quarters, with an earnings surprise in each. Four of the surprises have been negative.

On average, ADM trades 4.7 million shares a day, which supports a sufficient selection of options strike prices with narrow bid/ask spreads.

Implied volatility is 24%, in the lower half of the six-month range. Options traders are pricing in confidence that 68.2% of trades will lie between $28.38 and $32.70 over the next month.


Both puts and calls are trading around 70% above their 5-day average volume.


Archer Daniels Midland next publishes earnings on July 31. The stock goes ex-dividend in August for a quarterly payout yielding 2.29% annualized.


Decision for my account: I like ADM as a swing play, taking the bullish leg at this point. I've bought call options with December expiration and a $28 strike. I got the order filled with the stock priced at $30.53 and  will set the initial stop loss at $30.28, which is one cent below the fair price range in today's trading. If the rise continues -- if I have a viable position -- then I'll move the stop daily to lock in interim profits.


Update: The stop/loss got taken out an hour after the position was opened, for a loss of $23 per contract. Bad play! Me and Jamie Dimon.


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, June 18, 2012

FB: Fair price

In my posting earlier today about the small home health care company Almost Family Inc. (you can read it here), I discussed some modifications to the way I analyze charts.

In discussing the concept of a fair price range, I wrote:
I'll be looking at where the trades have occurred in the last five market days with an eye to finding entry points below the bulk of those trades, which I postulate occur in a range that both buyers and sellers see as being fair. Out side of that fair price range, either buying or selling will dry up.
Being a quant at heart, I use statistical methods to determine my fairness zone: It is the range that contains one standard deviation from the price that has the most trades. That range will contain 68.2% of trades.
Since no day is complete without a swing at the ugly duckling of the month, Facebook Inc. (FB), I though it would fun to apply my new chart-reading methods to everyone's favorite scapegoat.

After opening at $27.78, FB began a sharp rise on Friday, hitting a peak of $32.08 at about 12:30 p.m. today. It has since then declined, most sharply since 2:30 p.m.

However, it remains well above the fair price zone, which stands at $29.00 on the five-day chart.

Since opening today at $29.94, the price has risen to the $32.08 high. The fair price zone can move quickly on a current day chart, and so FB is trading within the zone and just in the last few minutes broke below the $31.77 level, the price that has the greatest number of trades so far today.

Bottom line: By this method of chart reading, FB is overpriced in the near term. It is fairly priced in  terms of today's trading levels.

Fair price zones:

  • 5-day: $26.82 to $29.00
  • Today, at 2:43 p.m.: $30.63 to $32.06


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.

AFAM: Home health care

Almost Family Inc. (AFAM) provides home health services in 11 states spotted across the South, Midwest, Northeast and Mid-Atlantic regions. It's nurses visit the ill and infirm at home, providing personal care, helping them manage their meds and preparing meals.

The Louisville, Kentucky company is on the cutting edge of the nation's rising population of elders. We are in the midst of a old folks bubble that will eventually dwarf the real-estate bubble of the 2000s that eventually helped bring down the global economy.

I selected AFAM from a list of 30 stocks added to the Zacks top-buy list over the weekend. Although the list is for subscribers only, Zacks typically makes a handful of its picks available to non-subscribers, and AFAM was among their number.

I haven't read the Zacks report yet so that my analysis will be independent. You can read it here.

I chose AFAM based on the chart, but with a difference from past practice. I've changed my screening technique, focusing less on current momentum and more on pricing relative to the recent past.

In doing so, I'm hoping to avoid the absurdity of trying to hop aboard the train at Penn Station when it's already halfway to Chicago. I'm looking to buy low, on the theory that if the analysts' are right, then I'll be able to sell high down the road.

I'll be looking at where the trades have occurred in the last five market days with an eye to finding entry points below the bulk of those trades, which I postulate occur in a range that both buyers and sellers see as being fair. Out side of that fair price range, either buying or selling will dry up.

Being a quant at heart, I use statistical methods to determine my fairness zone: It is the range that contains one standard deviation from the price that has the most trades. That range will contain 68.2% of trades.

AFAM hit the top of its five-day range, $21.49, on June 14, before dropping sharply to a low of $20.39 around noon Eastern today. It has since reversed, setting higher high and lows in the last three half hours. It remains below the five-day fair price range, suggesting that it is underpriced.

So far AFAM is trading within the fair price range, suggesting that it is priced to attract both buyers and sellers.

On the daily chart, the price has been in a sideways range for six trading days, with the range peak coming in at $21.49. The next higher reversal peak is at $22.49 on June 7. Both are resistance levels.

This is all occurring within an downtrend that began last April from $25.83.

Almost Family has return on equity of 10%, which is in the slow-and-steady range, but with very little long-term debt, amounting to only 10% of equity. That low debt gives it the financial clout to meet emergencies and exploit opportunities.

Institutions own 62% of shares, on the low side, and the price is cheap -- it takes only 57 cents in shares to control a dollar in sales.

Earnings fell through most of 2011, recovering a bit in the 4th quarter only to decline again the 1st quarter of this year.

Four of the last six quarters have shown upside earnings surprises, and two have surprised to the downside. The quarters have all shown a profit.

AFAM on average trades 44,000 shares a day, insufficient to support a wide selection of options or high open interest. Bid/ask spreads are on the wide side, although narrower than I would expect. I would not trade options on this stock because the liquidity is so poor. Shares only.

Implied volatility stands at 65%, in the upper half of the six-month range.

Options traders are pricing in confidence that 68% of trades will fall between $16.77 and $24.53 over the next month.

Over the last month, 68% of trades have been between $20.57 and $21.72, and for the last five days, between $20.76 and $21.33.

Almost Family next publishes earnings on Aug. 2.

Decision for my account: I like AFAM as a trade and if it had a better options liquidity, then I would jump it. However, the absence of the leverage that options provide means that I have better opportunities that I can pursue. So I won't be playing AFAM.


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, June 17, 2012

The Week Ahead: To stimulate or not to stimulate...

Now that Greek voters have decided not to wreck the euro-zone and cause the global economy to collapse (Thanks, Greeks!), the week belongs to the Federal Reserve's Federal Open Market Committee. Unlike Europe, the FOMC tends to be free of drama, so my sense is that we can all stop holding our breaths and resume trading with confidence.

This is one of the FOMC's two-day meetings. The announcement comes Wednesday at 12:30 p.m. Eastern, followed by Fedster forecasts at 2 p.m. and Chairman  Bernanke's news conference at 2:15 p.m.

Last week there was pundit chit-chattery about whether the Fed would resume stimulating the economy -- through QE3 market operations. Bernanke gave no encouragement to the idea in congressional testimony. Wednesday will play into the same meme.

The Fed is always a leading indicator in my book. Other leading indicators on the schedule are:
  • Housing starts, at 8:30 a.m. on Tuesday, with focus on building permits for new private homes.
  • Weekly jobless claims, at 8:30 a.m. on Thursday, with focus on average weekly initial claims for unemployment compensation.
  • The Fed's money supply figures, at 4:30 p.m. on Thursday, especially the M2 numbers.
  • And of course, the usual market-based leading indicators: The S&P 500 and the spread between 10-year Treasuries and the Fed funds rate.
The Conference Board will release its leading indicators index at 10 a.m. on Thursday. The index is based on the leading indicators noted above, plus others. 

Other reports of note:
  • The Home Builders' housing market index at 10 a.m. Monday.
  • Petroleum inventories at 10:30 a.m. Wednesday.
  • Existing home sales, covering the greater part of the housing market, at 10 a.m. Thursday.
  • The Philadelphia Federal Reserve Bank's survey of business ocnditions within the mid-Atlantic region at 10 a.m. Thursday.
Friday is totally blank. No econ reports are scheduled, making it a good day for fasting and meditation (or a long walk in the park), since presumably there will be little to motivate the market.

Practical trading:

By my rules, as of Monday I can trade July vertical and butterfly spreads along with iron condors,  and September single options and straddles. The short legs of my diagonal and calendar spreads will expire in July. Of course, shares are good at any time.

Good trading!

Saturday, June 16, 2012

Greek elections

I shall spend part of Sunday looking at the results of the Greek parliamentary election.

Long-time readers will know that I don't trade news. But to the extent that these elections impact the near future of the Euro-zone and contribute to American market hysteria, they impact my trading.

In a nutshell,
  • Polls close at noon Eastern.
  • Vote estimates based on exit polls will be released by 1 p.m. Eastern.
  • The actual vote count in Greece generally lasts through the night.
  • The punditry goes on forever.
But the vote, of course, may only be the start.

There are 21 parties participating, and seven of them are currently represented in the Hellenic Parliament.

If no single party wins enough seats to control the 300-seat Parliament outright, then the dickering begins. As is not uncommon in parliamentary democracies (unlike the American presidential model), there are enough partisan players with enough ideological overlap to allow governing coalitions to be formed.

So even if one party gains a plurality, it doesn't necessarily mean that it will end up governing.

Some useful reading:


From Wikipedia: 

Friday, June 15, 2012

FB pierces breakout level

Two weeks ago I analyzed Facebook Inc. (FB) as a potential trade like any other, rather than an OMG! IPO!! Get rich QUICK!!! Like!!!!! form of market silliness.

In my analysis -- you can read it here -- I identified the $30 level as a breakout point that would suggest a reversal of the downtrend, an identified a couple of higher levels for more cautious traders.

Today, in the last 5 minutes before the close, FB began a rapid rise and spiked up to $30.10 at 3:59 p.m. Eastern. It then immediately pulled back to below $30 for a couple of minutes, and then settled in to after-hours trading where $30, in the very, very near term, was acting as a support level.

The price spike came on a volume surge to 1.6 million in that last minute of trading, compared to 94,000 in the minute an hour earlier.

Falling implied volatility can sometimes be a forecast for rising prices, and that has proved to be the case with FB. I noted the rising IV in posting on June 7.

Obviously, whether today's peak was an anomaly or a turning point depends upon what happens next. Market analysis is always, at its core, an exercise in hindsight.

However, I'm putting a "Keep an eye on FB" notation on my To Do list for the week ahead.

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.

TER: Weak chart, but feel the love!

Teradyne Inc. (TER) sells automatic test equipment for semiconductors, wireless products, data storage and complex electronic systems. When people have systems that are too important to fail, the North Reading, Massachussetts company's goal is to provide testing functions that provide early warning of problems before they become fatal to those systems.

The investment research house Zacks named TER as its "Bull of the Day" in its free Profit from the Pros newsletter published today. I haven't read the Zacks report yet to ensure that my own analysis is independent. You can read it here.

At first glance the TER chart seems to show a former bull who has fallen on bearish times, who tries on occasion to recover past glories, but can never quite work up the energy for anything more than a feeble try.

TER capped its post-recession rise with a leg up that began in August 2010 at $9.64 and carried the price up to $19.19 by February 2011. Fro;m there, the price fell to below $11, and then last October began to claw its way back up, peaking April 26 at $18.01 before beginning another tumble down to $13.40.

It has since recovered from that swing low, but without much conviction -- a three-day rise followed by five days of sideways. The price is on the rise again today, hitting a high so far of $14.43.

However, the sideways range runs from about $14.60 down to $13.80, so the price has yet to break from its bounds, and there is no guarantee that it will. Thursday, an up day, saw lower volume, never a positive sign when it comes to upside momentum.

So the key levels are $14.60, which would signal a breakout, and then $15.24, a retracement high set May 29 on the decline from the April 26 peak.

And it is important to remember, big picture, that although TER has set a lower high since its 2010 peak, it has yet to set a lower low. There is nothing on the weekly chart that rules out labeling TER as being in an uptrend.

One thing to like about Teradyne is that although it fills a niche, it's a niche that encompasses a number of markets. It's an infrastructure company, and while such operations lack the bling of a retail product, they are in many ways more indispensable.

Perhaps that in part explains why, despite the bearish inclinations of recent trading, the analyst consensus is very bullish on TER. And institutions are betting heavily on TER -- they own nearly all of the shares.

Teradyne has a weak chart, it is true, but in the realm of professional analysis, you can sit back and feel the love.

A glance at the financials supports analysts' optimistic view. Return on equity is 22%, and long-term debt is quite low, amounting to only 11% of equity.

Earnings are a weak point -- not that the company isn't profitable but there is no earnings acceleration. From 2011 the quarterly earnings have jitterbugged all over the place, while remaining on the plus side throughout. And every quarter has shown an upside earnings surprise.

The price premium is not shockingly high by any means. It takes $1.82 in shares to control a dollar in sales.

On average TER trades 3.1 million shares a day, sufficient liquidity to support a wide selection of options with moderate to high open interest and narrow bid/ask spreads.

Implied volatility stands at 36%, slightly above the midpoint of the six-month range. it has been working its way higher since mid-May.

Options traders are confident that 68.2% of trades will be priced between $12.93 and $15.91, a gain or loss of 10% from the current price.

Current option trading is hot on the call side, with volume running nearly four times the five-day average. Puts are correspondingly idle, with volume amounting to 39% of the five-day average.

Teradyne next publishes earnings on July 23.

Decision for my account: I like TER on a persistent breakout above $14.60 and, if other demands on my trading funds allow it, would open a bull position on TER under those circumstances. The lack of earnings acceleration is more troubling to longer-term traders, such as value investors. For someone with my short time horizon -- not so much.

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, June 14, 2012

BRK: Buffett's stagnant pond

Everyone keeps an eye on what the Sage of Omaha is buying and selling. Warren Buffett is a rock star among traders. When I think of the famed value investor, I see him moving around Nebraska's "Gateway to the West" surrounded, like Lady Gaga,  by his posse and pursued by paparazzi eager for a photo and perhaps a stock tip.

KO, WFC, PG, WMT -- Buffett's portfolio is legendary, and there are websites out there in the Cloud dedicated solely to keeping track of his holdings.

But Buffett, as president and CEO of Berkshire Hathaway, is a business owner in his own right, and today I will run Berkshire through my analytical engine and see what I think of Buffett's management.

Berkshire Hathaway Inc. (BRK) started as an insurance company, but under Buffett's leadership it has become a holding company, vacuuming up as subsidiaries a number of companies that Buffett likes and taking heavy stakes in others.

BRK has two flavors of stock. Class A, which has voting rights, presently trades for $121,936 a share and has no options contracts. Class B, which lacks voting rights, trades for about $81 and does have options contracts.

The charts for the classes are fairly similar, but I'll use the more widely traded (and affordable!) Class B for my discussion.

BRK has basically been in the doldrums since February, moving in a sideways pattern ranging from about $82 down to $78. It is presently trading above the mid-range, with 1.6% to go before it hits the high price of the current sidewinder, set May 7.

Big picture, the sideways pattern comes in what looks to me, on the weekly chart, to be a downtrend confirmation in the making.

Coming off a 2009 recession low, BRK made a higher low of $68.48 in May 2010 on its way up to a swing high of $87.65 in February 2011. From there, it declined to $67.55 in September 2011, and now has risen to the present sideways movement in the low $80s. That amounts to a lower high following a lower low. That is a downtrend.

The counter argument is that BRK could well break above the $82.59 high and continue upward. On the weekly chart, it would need to peak above $87.65 to negate the downtrend.

Berkshire Hathaway has return on equity of 7%, on the low side of the range that usually piques my interest, and long-term debt is just a bit higher than I like, at 35% of equity.

Earnings have risen sharply the last three quarters, with two surprises, one to the upside last quarter and another to the downside the quarter before that.

Institutions own a bare 18% of shares, and of the Class B shares is slightly above parity -- it takes $1.35 in shares to control a dollar in sales.

(The low institutional ownership is unsurprising. Owning Berkshire means that you're putting investment strategy in Buffett's hands. If I ran a gazillion dollar institutional portfolio, I would much prefer that my own team and advisers make the investment decisions.)

The analyst consensus is mildly negative.

BRK on average trades 4.5 million Class B shares daily. That support a good selection of option strike prices, with high open interest and narrow bid/ask spreads.

Implied volatility stands at 17%, in the lower half of the six-month range, and has been stair-stepping higher since June 7.

Option prices assume that 68.2% of trades over the next month will fall between $77.25 and $85.41, for a maximum gain or loss of 5%.

Berkshire Hathaway most like will next publish earnings in August (no date has been announced). It pays no dividends, no doubt a reflection of Buffett's preference that companies retain their earnings in order to grow capital value.

Decision for my account: Not to detract from Buffett's sagely reputation, but BRK is not a trade that I would want to make. The chart, the implied volatility, the low return -- all have the swampy smell of a stagnant pond inhabited by dragonflies and frogs, and perhaps an odd gekko or two.


Having said that, there is a way to play BRK that could be profitable: Selling iron condors, a four-leg options construction that profits when a stock stays within a range. The options pricing would allow construction of an iron condor wide enough to cover both the ceiling and the floor of the recent trading range. 


For example, if I sell the July $80 call and $77.5 put, and hedge that by buying the July $82.5 call and $75 put, I have a position that will make $110 per contract in the remaining five weeks of its life if the stock remains between about $76.40 and $83.60. The risk is only slightly higher than the reward, and the buying power effect of the trade is only $146 at my brokerage. Lay on 10 contracts, and that's an easy grand.


An iron condor profits if a stock goes nowhere, and at this point, that's pretty much where I see BRK going.


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.