NUS: Anti-aging drama queen

Who would have thought that wrinkles could produce such great returns?

Nu Skin Enterprises Inc. (NUS) develops and distributes products that are said to slow the ravages of time -- anti-aging products that will, among other things, reset your "Youth Gene Clusters to their youthful patterns of activity" (as the company's website says).

Aging people are certainly a huge market -- we all eventually pick up on the fact that we are losing our youthful glows -- and serving that market has allowed the Provo, Utah company to consistently bring back returns on equity exceeding 30%.

It operates globally -- 88% of revenues lat year came from outside the United States.

The stock chart, however, shows that NUS investors are a nervous lot, prone to massive sell-offs even when the company shows upside earnings surprises.

The most recent of these, in late April, hammered the stock down by 33% in 14 truly awful days for people who were long in the stock. 

The news archives give not a clue to the cause of the decline. Earnings the day the fall began had come in 5% above analysts estimates. Within the next week the company announced an increase in share repurchases, declared a quarterly dividend, and raised its 2012 guidance.

A play on NUS at this point is a bet on whether the price will succeed in clawing its way out of the rubble.

The free-fall hit bottom on May 15 at $40.02. On June 5 the price began a zig-zag upwards from $40.21, hit a higher high in the post-decline period of $49.14 on July 9, corrected, and then began a two-day push that ended last Friday at yet another higher high of $51.76. The price has moved sideways in a narrow range (so far) in the two days that followed.

The most recent rise came with a volume spike and followed publication of a 6% upside earnings surprise.

The company's most recent return on equity was 34%, with debt at 34% of equity.

Annual earnings have risen steadily since 2007 -- Nu Skin showed no recession reversal. 

Only two of the last 12 quarterly reports has shown a decline from the prior quarter, and all 12 have shown upside earnings surprises.

Analysts are in love with this stock. My enthusiasm index for NUS is running at 100%.

Institutions own 82% of shares. The price is a bit above parity. It takes $1.77 in shares to control a dollar in sales.

In a rational world, NUS's chart would be on an uninterrupted rise. Yet its price has the sudden leaps and air pockets of a start-up facing uncertain prospects. 

Some stock charts bring to mind sober executives coldly discussing rational plans for increasing profits. NUS, by contrast, behaves on the chart like a drama queen.

Of course, market drama can be of benefit to a trader who takes positions favoring volatility, as I often do. Implied volatility for NUS stands at 62%, a bit above the mid-point of the six-month range. 

Volume on average runs at 1.1 million shares a day, and consequently the options selection is in that awkward space between awful and awesome. Strike prices are at $5 intervals. Open interest is adequate for a few strikes, and bid/ask spreads are acceptable.

With a stock having volume this low, the trader never knows how liquid it really is until he or she places a limit trade and sees how quickly it is filled.

Options are trading at volume well below the five-day moving average. Overall, volume is running at about 60% of the average, with calls having a 25 percentage point edge on puts.

Options are pricing in confidence that 68.2% of trades will fall between $42.20 and $60.48 over the next month, for a potential gain or loss of 18%.

NUS is trading near the top of today's fair price zone, which ranges from $51.03 to $51.40, encompassing 69.2% of transactions surrounding the most traded price, $51.14.

Nu Skin next publishes earnings on Oct. 22. the stock goes ex-dividend in August for a quarterly payout yielding 1.56% annualized.

Decision for my account: Given the high volatility and chart's tendency for drama, I would only play NUS as an options spread. I want some protection against decline and am willing to limit profits to achieve that goal.

At this point in the cycle it's too late to open August option spreads and too early for September's. So I'll wait until next week and see what the price has done then.

But the finances are great, consistently. Structured right, I'm inclined to favor a NUS position among my holdings.

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.

LL: Big move, big mo', sad analysts

Sometimes I'll run across a stock whose chart and financials seem to glow with awesome goodness, but then I'll encounter, standing by the side of the chart, a group of market analysts, clothed in ashes and sack-cloth, weeping and wailing as they tell a tale of woe.

Such is the case with Lumber Liquidators Holdings Inc. (LL).

The company's web site shows its founder and chairman Tom Sullivan standing in front of a truck with the hand-written slogan, "Hard Wood, Soft Prices!". That's Sullivan's business model in a nutshell: Build hardwood floors for lower prices than the competition.

The chart story for LL is also simple: Big move, big momentum. The question is whether LL still has the speed to keeping sliding up the slope.

LL gapped up 12.2% last week after a 45.8% quarterly earnings surprise. After gapping, it kept on rising, hitting a high Friday of $44.73, up 37.3%  from the pre-earnings close.

Today the price pulled back a bit, although it stayed within Friday's range. It's the first very near term correction since the upside gap.

The Toano, Virginia company's stock has been rising, with corrections, since September 2011. The most recent leg up predates the earnings gap. It began Feb. 23 from $20.03.

So this a chart with momentum, a fact recognized (belatedly?) today by the stock analysis company Zacks, which on the public portion of its website named LL as Today's Momentum Stock.

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

Lumber Liquidators operates 266 stores in 46 states, and last year made its first foray into Canada. Size gives the company opportunities of economies of scale: Building hardwood floors in craftwork, to be sure, but Lumber Liquidators can buy the materials in bulk, allowing it to negotiate favorable prices with suppliers.

Sounds like a plan to me, but analysts are less than enamored with LL. Their enthusiasm index stands at a negative 60%, unchanged from a month earlier.

Perhaps its the bargain basement business model, which can be seen as a race to the bottom. Perhaps its the uncertain state of the economy; no one buys a new hardwood floor of they're uncertain they'll have a job come fall.

For whatever reason, LL's momentum is largely leaving analysts cold.

Certainly on the books Lumber Liquidators is a company to love. Return on equity is 17%, and there is no long term debt.

On the downside, annual profits per share  show no acceleration to the upside.

Earnings for the peak quarter, the 2nd, are unsteady: Up in 2010 with a downside surprise, down in 20111 with an upside surprise, and then way up in 2012 with another upside surprise. That pattern tells me that Lumber Liquidators is extraordinarily sensitive to fears about the economy.

Institutions own pretty much all of the shares, and the price isn't too far above parity: It takes $1.60 in shares to control a dollar in sales.

The stock is less liquid than I generally like, trading 1.2 million shares a day. But this supports a reasonable selection of option strike prices, with high open interest and not-too-horrible bid/ask spreads.

My main complaint with the options is that near-the-money strike intervals both in the front month and the out months are at $5, more than 10% of the stock price. That makes it hard to fine-tune the risk of an options position.

Implied volatility stands at 46%, about mid-way through the six-month range. Volatility has been on a roller coaster ride since early June, falling to around 33%, rising above 50%, heading sideways into late July, then spiking to 55% before dropping back to the present level.

The price may be sprinting to the upside, but volatility has been an inconstant beast.

Options are pricing in confidence that 68.2% of trades will fall between $37.33 and $48.87 for a potential gain or loss of 13%.

Option volume is running around three-quarters of its five-day average -- not surprising given the volume spike that accompanied the upside gap. Puts are running at 93% of average volume, at calls at 51%.

The stock is trading within today's fair-price zone, which runs from $42.99 to $43.64 and encompasses 68.2% of trades surrounding the most traded price, $43.18. The five-day zone surround $43.23 and runs from $38.82 to $44.55.

Lumber Liquidators next publishes earnings on Oct. 22.

Decision for my account: I would only play LL using stocks. The options are a problem because of the overly wide strike intervals. Also, by my rules we're too close to August expiration to trade spreads, and too far away from September expiration. I'll be open for vertical spreads again on Aug. 3.


The negative analyst enthusiasm is less of a problem. I suspect they're focusing on fears of another recession triggered by collapse of Greece and Spain, bringing down the euro, and on and on and on. I could be desperately wrong, but it would be political suicide for any government to let that happen. They know the problem. They know how to avoid it. They'll play brinksmanship for awhile in order to get a good deal, but they won't let the house of cards collapse. That's my opinion, at least.


A third aspect of the decision is the rapidity of the rise over the past three days. Big moves end with profit-taking and a correction. I want to see some of that correction before opening a position. I think going long now would amount to buying at the high.


Bottom line: I'm passing on LL for now. I'll look at it again next week.

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.

Travels in Asia

I'll be travelling in Asia for much of August, but a true private trader never stops trading, whether lugging a laptop on the road, punching an iPhone from the peak of Mt. Fuji or ensconced at home base before a cozy bank of monitors glowing with charts and tables.

The time zone difference, however, does create some challenges. The U.S. markets open at 10:30 p.m. Japan time and close at 5 a.m. -- not my usual hours for full alertness.

So my postings will come after the market closes in the United States, while I sit at a kitchen table with a spectacular view of Hakata Bay on Kyushu, a steaming pot of green tea close at hand. And postings may well be spotty to non-existent on days when I'm in the air.

Otherwise, I'll be doing my usual thing: Screening a block of stocks, picking one to analyze in detail and making a decision about whether it's a play I want to take.

I hope you'll drop by to share the fun.

Tim

The Week Ahead: FOMC, employment, income

The week's economic reporting will be dominated by the Federal Open Market Committee meeting, with employment and personal income and outlays running a close behind.

The Fedsters who set monetary policy are facing a slowing in economic growth. The question is how far will they go to re-heat the economy, beyond the long-term bond swaps that are presently the main method.

The term we'll be reading a lot in the covering is QE3, which always sounds to me like large British ocean liner but actually stands for the third round of quantitative easing, where the Fed buys assets from banks.

The FOMC announcement will come Wednesday at 2:15 p.m. Eastern. No news conference this time around.

One of the inputs to the committee's deliberations is the government's monthly employment report, which has showed tepid job creations and stubbornly high unemployment rates. The report for July will be released on Friday at 8:30 a.m.

The employment report comes with a prelude: The ADP employment report from the large payroll company Automated Data Processing will be out Wednesday at 8:15 a.m. and is treated as a sneak preview of the government's figures.

Personal income and outlays -- what we made vs. what we spent -- will be reported Tuesday at 8:30 a.m. Much of the economy's angst have the past few years has been due to people saving their money rather than spending it. It is this report that contains numbers used to calculate the savings rate.

Leading indicators out this week:

The vendor performance (deliveries times index) is reported in the Institute of Supply Management's manufacturing index, out at 10 a.m. Wednesday.

Manufacturers' new orders for consumer goods and materials and new orders for nondefense capital goods are part of the factory orders report, at 10 a.m. Thursday.

Average weekly initial jobless claims will be reported at 8:30 a.m. Thursday.

The average hourly workweek in manufacturing is part of the employment report, Friday, 8:30 a.m.

Friday: The index of consumer expectations from the Reuters/University of Michigan consumer sentiment report, 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.


Also, I like to keep an eye on the Baltic dry index of world shipping, updated daily.

Other reports of interest:

Monday: The Dallas Fed's manufacturing survey at 10:30 a.m.

Tuesday: The employment cost index (what employers pay workers) at 8:30 a.m., the Chicago purchasing managers' index at 9:45 a.m. and the Conference Board's consumer confidence report at 10 a.m.

Wednesday: Auto sales throughout the day, construction spending at 10 a.m. and petroleum inventories at 10:30 a.m.

Friday: The Institute of Supply Management's non-manufacturing index at 10 a.m.


Trading calendar

By my rules, as of Monday I can trade October single options and straddles. Of course, shares are good at any time.

Good trading!

SLB: King of the oil patch

Schlumberger Ltd. (SLB), the largest oilfield services company in the world, has broken above its previous swing high after it was upgraded to buy by Goldman Sachs.

SLB began its present uptrend from $60.17 on June 26 and hit a new trend high today of $73.47 (so far) with a two-day sharp thrust. Next resistance is at around $76, a high set in early May as the price worked its way downward.

Volume rose on the first day of the upward thrust, but peaked a lower level than the previous volume peak on July 20, a divergence that often bodes ill for continuation of the trend.

Long term, SLB has been in a downtrend since late July 2011, when it peaked at $95.53. It declined to $54.79 in October 2011, recovered to $80.78 in February this year, and then declined to a higher low and is now working its way up.

A break above the $81 level would put the longer term price movement into an uptrend from last autumn.

That's all in the midst of a years-long uptrend from the 2009 recession low.

SLB, then, is in an uptrend within a correction within a downtrend within an uptrend. This is not a stock on a clear path.

And that's not surprising. The Houston, Texas company makes its money in the oil patch, a place of great risks,  great profits and great volatility.

Oilfield services isn't what it used to be back in the day when my father was part owner of a small oilfield services company in Oklahoma. Used to be companies like Schlumberger, and Dad's company, came in and did the grunt work that was too unskilled for major oil companies' talents.

Nowadays, the majors have contracted out much of the work and more important, much of the technological innovation, that drives the industry. Schlumberger and its peers are on the cutting edge of the energy economy.

The Economist recently published an overview of the oilfield services industry that provides excellent perspective on majors utter dependence on these companies. You can read it here.

My takeaway is that the major oil companies like ExxonMobil may indeed be the rulers of the petroleum industry, but when it comes down to the nitty gritty of finding the stuff and getting it out of the ground, Schlumberger is king of the oil patch.

Whatever the risks, or perhaps because of them, analysts are super-enthusiastic about SLB. The enthusiasm index is 82%, up from 68% a month earlier.

Schlumberger reports return on equity of 17% with a very low level of long-term debt, amounting to 24% of equity.

Annual earnings dropped sharply in 2009 (like everyone's) and have risen in the two years that followed. Quarterly earnings have generally risen, although there have been some pullbacks. Nine of the last 12 quarters, including the most recent, have shown an upside earnings surprise, and three have surprised to the downside.

Institutions own 74% of shares. The price has risen so that it takes $2.27 in shares to control a dollar in sales.

SLB on average trades 8.4 million shares a day, as a wide selection of options strike prices and very narrow bid/ask spreads.

Implied volatility stands at 29% and falling. It is near the floor of the six-month range. Options are pricing in confidence that 68.2% of trades will fall between $67.10 and $79.26, for a maximum gain or loss of 8%.

Options are trading 32% above their five-day average volume, with calls having a seven percentage point edge over puts.

The stock is trading well above today's fair-price zone, which runs from $71.15 to $72.53 and encompasses 68.2% of trades surrounding the most-traded price, $72.04. The five-day fair-price zone extends from $67.40 to $70.23.

Schlumberger next publishes earnings on Oct. 18. The stock goes ex-dividend on Aug. 29 for a quarterly payout yielding 1.5% annualized.

Decision for my account: I'm wait-and-see on SLB. The lower volume of the last two days, compared to the previous week-long rise, suggests I would be wise to wait for a pullback before opening a position.


Also, I would want to play SLB as an options spread, and for that I want to get past the ex-dividend date.


Otherwise, I like the financials, while recognizing the risking nature of the energy sector. Those risks are a reason why I want a hedged position with options, rather than a simple bull position with shares.

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.

USB: Bored on the brink of breakout

US Bancorp (USB) bumped up to a new swing high last week after coming in slightly ahead of analysts' earnings expectations.  But then came a two-day fall, without any obvious news, showing once again bad things tend to happen after good news in this Game of Shares we play.

Go figure!

In the past four days USB has risen and is again approaching the $33.99 swing high. A persistent break above that level would mean that the uptrend from $28.58 on June 5 is still in place.

Although the price has consistently set higher highs this week, the highs have been followed by declines. And the rise has been accompanied by declining volume, never a bullish sign.

US Bancorp is the fifth largest commercial bank in the United States by assets. The Minneapolis, Minnesota company has branches in 25 states.

Big banks these days tend to be grouped into the greater evils and the lesser evils. My sense is that US Bancorp stands among the lesser evils in the public mind, although none of the big players has come through the past few years with its reputation unscathed.

Analysts have little enthusiasm for USB. The enthusiasm index is negative 19%, down from negative 12% a month earlier.

And yet, Zacks today, among their picks published for non-subscribers, named USB as its growth and income stock of the day, an opinion well worth listening to. (I haven't read the Zacks analysis yet, in order to keep my own analysis independent. You can read it here.)

The stock's movement over the past two months has shown trader enthusiasm for USB's prospects.

And the financials give a certain backing to the idea that USB is a bank capable of ginning up some enthusiasm.

US Bancorp reports return on equity of 16% with long-term debt standing at 85% of equity.

After hitting a recession low in 2009, earnings have risen spectacularly the past two years, and quarterly earnings have shown steady increases in profit stretching back into 2010.

Of the last 12 quarters, 11 showed upside earnings surprises, and only one, back in 2010, surprised to the downside.

Institutions own 68% of shares, and the price has been bid up quite a bit, so that it takes $3.21 in shares to control a dollar in sales.

USB on average trades 11.1 million shares a day, sufficient to support a good selection of option strike prices with high open interest and narrow bid/ask spreads.

Implied volatility stands at 22%, near the six-month low. It has fallen the past two days. Options are pricing in confidence that 68.2% of trades will fall between $31.55 and $35.73 over the next month, for a maximum gain or loss of 6%.

Options are trading at less than 30% of their five-day average volume, with calls at 26% and puts at 16%.

We all have a tendency to translate "lack of enthusiasm" to mean "falling prices". Looking at the options data, and I think the phrase in the case of USB is best translated as "we're so bored". This is one of the most ho-hum set of figures I've encountered for awhile.

USB is trading within today's fair-price zone, which ranges from $33.57 to $33.73 and encompasses 68.2% of trades surrounding the most-traded price, $33.62. The five-day fair-price zone runs from $33.16 to $33.69, with a most-traded price of $33.41.

US Bancorp next publishes earnings on Oct. 15. The stock goes ex-dividend tomorrow, July 27, for a quarterly payout yielding 2.32% annualized.

I noted above that Zacks considers USB to be a growth and income play. That income part has an impact on my strategy. To capture the dividend, I need to own shares. But that reduces my profit on any calls I sell for income against those shares, as compared to an all-options strategy, such as a diagonal spread.

Also, being short a call as the ex-div date approaches brings the danger of that call being assigned early by its owner, who is obtaining the shares more cheaply and therefore increasing his or her dividend yield.

Decision for my account: I'm ignoring the analysts. There's enough counter-evidence strewn about that casts doubt in my mind on the value of their conclusions. I like the financials, and the high debt level isn't awful for a banking company.


The dividend complicates the strategy, but it's manageable, thanks to the calendar. Here's what I'm doing.


The falling volume on the chart is problematic for USB as a momentum play. But I'm adopting a different strategy that allows for profit even if traders are losing interest.


I've bought shares in USB today. I'll collect the dividend as the stock goes ex-div tomorrow. The quarterly yield is 0.58%. Tomorrow or Friday, I'll then sell a covered call against the shares, for an estimated yield of 1.2%. And as a result, I get a yield in August of 1.78%.  Not shabby at all.


I'll still own the shares, and so I'll be able to continue to sell covered calls against them, increasing my yield further. And I will have avoided the risk of assignment in the run-up to the ex-div date.

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.

AAPL: Chart Talk

"A" may be for "Apple", but "AAPL" is for "anxiety".

Few companies are watched as closely as is Apple Inc. (AAPL), the people who put the iPod in your ear, the iPhone in your pocket and the iPad in your briefcase. Not to mention the MacBook Air on your lap and the iMac at home, where you write awesome pieces of music for your garage band.

And few companies experience the range of overwrought analysis as Apple does. With most companies, stock analysis is a cold and clinical game. With Apple, it's more a like a personal intervention with a friend who's clearly on the road to ruin and must be pulled back from the brink.

Apple on July 24 published earnings that came in 10% below analysts' expectations. The earnings were well above the comparable quarter a year earlier, as were sales.


Earnings were down from the previous quarter, for the second time in a row.


Click here to read Apple's announcement.


The market responded more to the analyst miss than the financials themselves. The stock gapped down by 4.4% overnight. The financial media were filled with headlines such as this from iStockAnalyst: "Has Apple ... become forbidden or low-hanging fruit for investors?"


Time to take a deep breath and look at things in perspective.

One way I assess the magnitude of a drop is by how long ago the stock last closed at that level. The gap brought AAPL down to June 28, when the stock closed at $569.05. That's only 18 trading days ago. This is not a decline of historical magnitude.

Some of the post-earnings analysis referred to the fact that the stock was trading below its $644 all-time high of $644. True, and the stock hit that price in April and has never traded close to that level since. So it's old news, and not of any particular relevance.

AAPL has been trading in a sideways range since April, with a ceiling at $630 and a floor at around $560, with one major week-long breakout below the floor down to $622.18 on May 18.

This morning's downside gap keeps the sideways range intact.

Very near term, AAPL began an uptrend within the range, rising on June 29 off of the prior-day's low of $565.61 and reaching a swing high of $619.87 on July 10. From there it began a very shallow correction, but had not hit a lower low within the uptrend.

The uptrend, in fact, remained in place, and even with the downside gap, still remains in place, as long as the price doesn't fall below $565.61.

Big picture, AAPL has been in a consistent uptrend since March 2009, and that uptrend remains intact despite the correction off of $644. The last leg up in this long-term trend began at around $360, and by the book, it would take a decline below that level to break the uptrend.

So, APPL is in a correction of an uptrend within a sideways trend within a correction of an uptrend. Sorry that the analysts were off by a bit. The AAPL chart says, "No big deal."

AAPL's options are trading well above their five-day average volume, by about 70% for calls and 80% for puts.

Today's trading is within the fair-price zone, which runs from $570.45 to $574.62 and encompasses 68.2% of trades surrounding the most-traded price, $573.07. The five-day fair-price zone was set before the downside gap and so is fairly irrelevant.

Implied volatility dropped sharply with the price, from the middle of the six-day range down to about a quarter above the low. It stands at 26%. That narrowing of implied volatility suggests that traders expect the worst of the the decline to be over.

Options are pricing in confidence that 68.2% of trades will fall between $531.33 and $615.77 over the next month.

One potential complication is that Apple declared a dividend. It goes ex-div on Aug. 13 for a payout yielding about half a percent annualized.

It's not a big dividend, and probably isn't enough to produce an early exercise of any calls that a trader has sold, but the possibility is still there, and must be taken into account. On the other hand, the ex-div date is close enough to the Aug. 17 expiration that early exercise would be no big deal.

Decision for my account: AAPL has long been part of my diagonal spreads strategy, and I hold an AAPL diagonal today: Long the January $555 call and short the August $635 call. The present low level of the stock means that my August short will expire unexercised and I can sell another call for September, reducing my basis still further.


If I were opening a new position (I'm not), I would play it as a bull put spread for credit, long the August $555 put and short the August $570 put. The position would be profitable down to $564, below the level that would invalidate the present near-term uptrend that's correcting. The potential maximum profit of the position is 64% of risk.

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.

WFC: The breakout point.

As Europe continues to pass through the Seven Stages of Greece and the Pain in Spain, Wells Fargo Co. (WFC) has one big strike against it: It's a bank.

Banks are exposed to all the craziness that the euro-zone is capable of. So banks make traders like me very, very nervous. Long story short: I understand liquid markets and can hedge them. I don't understand nervous politicians and find them to be unhedgable.

As  banks go, San Francisco's Wells Fargo is not in the top ranks. True, it's listed as the 4th largest bank in the U.S. by assets, and the largest by market capitalization. But it only ranks 24th globally by assets, just above Credit Suisse.

Wells Fargo has European exposure. But there's no reason to believe that they're at greater risk than any other large bank. It's not the individual company that's the problem. It's the sector.

On the daily chart, WFC has been in an uptrend since June 6, a rise that carried it from $29.95 to a July 16 high of $34.35. Since then it has worked sideways for four days, and then gapped down to the present two-day range, running from $33.10 to $33.71.

The downside gap came renewed euro-angst. The priced rose sharply on July 13 after WFC announced earnings that were close to expectations.

The key take-away from this chart is the uptrend. The earnings bounce pushed the price to a higher high within the present swing. The gap down still kept a higher low in place. It's the sort of set up that a bargain-seeking trader will declare to be an opportunity to buy low in order to catch the next step up in the trend.

Longer term, WFC has been in a sideways trend since the spring of 2009, bouncing between about $23 and $34. A decisive break above the March 19 high of $34.59 would spell the end of the sidewinder.

That breakout point -- $34.59 -- is crucial to the logic of any WFC position.

The cautious trader will wait for the breakout before entering WFC. The risk-taker will see the present very minor pullback as a chance to get in before the upward thrust. And the story trader will be paralyzed with fear lest Spain default, destroying the euro and the global economy as we know it.

Analysts, actually, are quite enthusiastic about WFC, with an enthusiasm index of 56%. That's up from 54% a month ago, due to one analyst adding coverage at the strong-buy level.

Wells Fargo reports return on equity of 12% with the usual somewhat high level of long-term debt that is common to banking. Debt is running at 122% of equity.

Annual earnings have risen continually since hitting a recession low in 2008. Quarterly earnings have also seen a continual rise from 2010 onward. All of the last 12 quarters have shown positive earnings, and 10 have shown upside earnings surprises, with two surprising to the downside.

Institutions own 76% of shares, and the price has been bid up considerably. It takes $2.14 in shares to control a dollar in sales.

WFC on average trades 26.8 million shares a day, enough to support a good selection of option strike prices with very high open interest and very narrow bid/ask spreads.

Implied volatility stands at 25%, near the floor of its six-month range. It has been trending sideways since mid-July. Optoins are pricing in confidence that 68.2% of trades will fall between $30.93 and $35.67 during the next month, for a potential gain or loss of 7%.

Options are trading only slightly above their five-day average volume, but with a huge difference between calls and puts. Call volume is running at about half the five-day average; put volume, at about double.

The stock is trading within today's fair-price zone, which runs from $33.19 to $33.42 and encompasses 68.2% of trades surrounding the most-traded price, $33.31. The five-day fair price zone runs from $33.48 to $34.32, and because of the recent downside gap the stock is trading below the five-day zone.

Wells Fargo next publishes earnings on Oct. 15. The stock goes ex-dividend in August (probably early August) for a quarterly payout yielding 2.64% annualized.

Decision for my account: I'm inclined to wait for a breakout from the sideways trend, above $34.59. One reason for waiting is the ex-dividend date, which will probably come within the August options period and so will increase the chances of any WFC options I sell being assigned early. Plus, it's a bank. The euro-zone crisis with Greece and Spain is a real wild-card that I don't know how to play.


For those reasons, I'm passing on the trade.

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.

GE: Troubled transnat

Ever since I read Kim Stanley Robinson's Mars trilogy, I've been fascinated by General Electric Co. Robinson makes much of the transnational corporations that dominate his fictional world at the start of the 22nd century. And GE, in this second decade of the 21st century, is about as close to a transnat precursor as we have.

GE has risen 2.5% intraday in today's trading following a earnings announcement before the opening on Friday that produced a not-too-impressive one cent upside earnings surprise.

And that's sort how things are with a transnat. It controls so much about its operating environment that it doesn't really have much in the way of surprises. Transnats are predictable as long as their environment is free from major shocks, or at least that's their goal.

Of course, our environment and GE's hasn't been free of major shocks over the last few years, not with the Great Recession scything through the economy.

GE has been churning sideways since mid-June in a range that, at the extremes, has run from $18 to $21. The range narrowed over the last nine trading days to around $19.40 to $20, with one upside breakout after Friday's earnings announcement that quickly retraced.

Today's price also pulled back from $20, which appears to be setting up as the challenge that must be met if GE is to rise.

GE is headquartered in Fairfield, Connecticut and has its fingers in a lot of pies, as transnats are wont to do: Applies, jet engines, consumer electronics, equipment for the electrical grid and for exploiting energy sources ranging from coal to oil to hydro, wind and nuclear.

It's a finance company, serving both businesses and individuals. It is big in medical tech, light bulbs (thanks to founder Thomas Edison), railroad management and water treatment. It's also a software company.

GE is the 3rd largest company in the world as calculated by the Forbes Global 2000. It operates practically everywhere in the world.

So the story fascinates me, but as a trader my job is to ignore the story and go to the heart of the matter: How can I make a profit over the next weeks and months.


Long term, GE has been in a sideways trend since late 2009. It set a high near $20 in early 2010, near $22 in early $2011, and then $21 in early 2012.

The two lows during this sidwinder have both bounced off of $14 or so.

A persistent break above $20 would potentially put GE in an uptrend, although it would take a break above $20.80 to nail it.



If $20 is the near-term challenge, then $22 is the level GE needs to break to begin an unambiguous uptrend on the longer-term charts.


But even without an uptrend, an options spread on GE can profit in a sideways movement.


So that's two chances out of three to make some money on this company, and that makes it worth considering.

General Electric reports return on equity of 11%, but with a huge long-term debt amounting to 3-1/2 times equity. The return is too low for a longer-term growth play and the debt is way too high for a value play.

Annual earnings fell in 2008 and again in 2009 as the global recession set in. The 2009 figures is less than half of that of two years earlier, before capitalist finance collapsed.

Earnings recovered very slightly in 2010 and a bit more in 2011, but the level in 2011 was 57% of 2007 earnings. If earnings remain on track, 2012 will also see a higher level but will remain far below the pre-recession level.

Quarterly earnings tend to remain fairly stable quarter to quarter. Of the last 12 quarters, 11 have shown upside earnings surprises and only one a surprise to the downside.

Analysts are showing 30% enthusiasm for GE, which seems fairly high for a company with such unimpressive financials. However, enthusiasm is down from 40% a month earlier.

Only 52% of shares are owned by institutions, which is pretty low for a household name. The price has been bid up slightly so that it takes $1.45 in shares to control a dollar in sales.

Bottom line on GE's financials: It may be a transnat, with lots of power and control, but it's a troubled transnat that has been unable to overcome the impact of the 2007/08 collapse.

Troubled or not, GE is one of the liquidity megastocks of the market, trading on average 51.7 million shares a day. It supports a good selection of options with high open interest very low bid/ask spreads.

Implied volatility stands at 25%, slightly below the six-month mid-range. It has risen sharply the last two trading days.

Options are pricing in confidence that 68.2% of trades will fall between $18.48 and $21.34 over the next month, for a maximum potential gain or loss of 7%.

Options are trading 24% above their five-day average volume, with puts showing slightly heavier relative volume than calls.

The price today is above the fair-price zone, which runs from $19.52 to $19.88 and encompasses 68.2% of trades surrounding the most-traded price, $19.70. The price is at the top of the five-day fair-price zone, which runs from $19.56 to $19.95.

General Electric next publishes earnings in October. The stock goes ex-dividend in September for a quarterly payout yielding 3.41% annualized.

Decision for my account: Given the fairly dismal financials, I'm not enthusiastic about GE at this time. A clear uptrend would change my mind.


From a story standpoint, GE's weakness is that it makes durable goods: Big, expensive items. These are the first things to go off of a buyer's budget when times turn tough. Given the uncertainty over a renewed recession, I see GE as something to stay away from at this point.


The thing is, with the financials as troubled as they are, I fear bad news, the sort of announcement or guidance that sends the price skittering down toward the cellar.


Fear is a bad drinking buddy for a trader. So I'm passing on the trade.

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 Week Ahead: Durable goods, plus change

Durable goods orders dominate the week's econ reports. The report, out Thursday at 8:30 a.m. Eastern, tracks purchases of big-ticket items, from mini-fridges for your dorm room to Boeing 777 aircraft for your vacation flight to Asia.

Gross domestic product will be reported Friday at 8:30 a.m. But since it's the third time around for these 1st quarter numbers, I don't consider then to be significant to the market (barring a major revision, which is rare).

All in all, it's not a busy week. Durable goods, plus change.

Leading indicators out this week:

Thursday: Weekly unemployment compensation claims at 8:30 a.m.

Friday: The index of consumer expectations from the Reuters/University of Michigan consumer sentiment report, 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.


Also, I like to keep an eye on the Baltic dry index of world shipping, updated daily.

Other reports of interest:


Wednesday: New home sales (the smaller part of the market) at 10 a.m., and petroleum inventories at 10:30 a.m.

Thursday: Pending home sales (contracted, not closed) at 10 a.m.

Trading calendar

By my rules, as of Monday I can trade August vertical and butterfly spreads, the short legs of diagonal spreads, and iron condors, and October single options and straddles. Of course, shares are good at any time.

Good trading!

TOL: Balance of power

When I wrote about Toll Brothers Inc. (TOL), the luxury homebuilders, on June 9, I said that a break above the near-term high at that moment, $30.41, "would suggest resumption of the uptrend. (You can read the full post here.)

The price has since broken above that level four times, the highest being $30.63 today. But never decisively, and always with a pullback, today included.

These are breakouts, but breakouts without conviction. They show a finally tuned balance of power between TOL's bulls and bears.

Nothing has changed since my last analysis except that analyst enthusiasm has dropped from zero to a negative 7%.

And implied volatility has continued to decline, generally a bullish sign. It was a 38% on July 9. Now, 11 days later, it's at 35%.

Finally, we're at the last moment of opportunity to open a position in TOL before my rule kicks in that forbids opening new positions within 30 days of an earnings announcement. Toll Brothers next publishes earnings on Aug. 22.

So, decision time.

First, some numbers.

Options traders are pricing in confidence that 68.2% of trades will fall between $27.27 and $33.49 over the next month.

Call volume is running trip the five-day average, while put volume is at two-thirds of that average.

The stock is trading near the top of today's fair price zone, which runs from $29.66 to $30.34 and includes 68.2% of trades surrounding the most traded pricde, $30.32.

Decision for my account: With 3% return on equity, TOL still counts as a company in the doldrums, and that's troubling. But in my opinion we're at a point where things are going to start looking up. If I'm right, the market will anticipate that. TOL's repeated breakout attempts are a sign of that in my book.


The lower analyst enthusiasm -- not so troubling. the change was caused by an analyst dropping coverage. I show 14 analysts providing coverage at this point.


In looking at this trade, I'm happy with the chart -- uptrend in the mid-term -- and with the high call volume. 


And frankly, TOL used to build a lot in the Washington, D.C. area when I lived there. I thought then and still think that they're a smart company.


Ultimately, I think I've fallen victim to my narrative about Toll Brothers and the prospects for a recovery. Not a best practice for a private trader, to be sure. 


A grizzled trader once told the younger me, "Rules are rules. They are not for breaking." I think he then added a sentence that included the phrase "young whippersnapper".


Now that I'm the grizzled trader, I've grown to appreciate my old mentor's viewpoint. But I still disagree. Rules are for breaking if there appears to be profit in it. And for the reasons I've stated, I think there is some profit to be milked from TOL.


So, I've opened a short-term bull position in TOL, structured as a bull put options vertical spread for credit with an August expiration. I'm long the $28 put and short the $30.


The position as filled has a potential maximum profit of 38% of risk and will show a profit at expiration down to $29.45, well below the breakout 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.

Algos gone wild!

Someone's automated trading algorithm has gone rogue.

Here's a one-minute chart for Coca-Cola Co. (KO) for Wednesday and Thursday. Wednesday is normal. Thursday is, well....

IBM and MCD showed similar regularities, although KO's was the most striking.

Bloomberg's story is here, although it's mainly speculation as to the cause.

In terms of analysis, it's an uptrend (higher highs and higher lows) and a swing-trader's dream. The day-traders must have been going crazy trying to deal with this.

CCL: Cruising through a channel

Carnival Corp. (CCL) was cruising through an uptrend from early June until the day before earnings, June 21, when analyst talk about softening cruise pricing sent CCL's stock price into a 3% dive from $35.61 toward Davy Jones' locker.

A 144% upside earnings surprise the next day slowed the descent, and indeed CCL bobbed in the currents for a few days before sinking some more, until it halted at $31.99 on July 12.

CCL's price began rising again three days ago, on July 17, and the ascent accelerated today, reaching a high (so far) of $33.73.

Carnival operates cruise ships throughout the world (hence the lame maritime metaphors -- I take my amusement where I can find it).

The Doral, Florida company is the largest cruise ship operator in the world, with 11 individual cruise-lie brands and a fleet of more than 100 ships. Some of the brands in its portfolio are Carnival Cruise Line and Holland America in the U.S., Costa Cruises in Italy, Cunard Line and P&O Cruises in the U.K., and Ibero Cruises in Sain.

The recent price action, described above, is but a blip in a large sideways trend that has held sway since mid-2011. The price since then has ranged roughly between $29 and $35, with a few failed attempts to break out above and below that range.

The prospects for this leisure business, three years into the recovery, have left analysts largely unenthusiastic. The level of enthusiasm among the 15 analysts following CCL stands at a mere 7%. 

To me this suggests expectations that the sideways channel will continue. Fortunately for nimble traders, it is a channel wide enough to navigate for profit.

The decline to the recent swing low within the channel was a simple zig-zag, with an interim high of $34.70, which serves as the nearest resistance. From today's high, the price has 2.9% to go before encountering that resistance, and 5.6% before hitting the June high that marked the start of the decline.

Those distances allow for good profit from leveraged short-term plays.

Carnival reports return on equity of 6% with a moderate level of long-term debt, amounting to 43% of equity. Cruising is a business with heavy demands for equipment and workers, so I'm not surprised to see a return below 10%.

Annual earnings hit a low point in 2009, recovered in 2010 and then stalled in 2011. But this earnings series needs some perspective: 2009's earnings decline from 2007, pre-recession, was only 24%, and the 2010 recovery was 10%.

Given the magnitude of the hit leisure businesses took after capitalist finance collapsed in 2007/8, those changes seem remarkably small to me.

Carnival runs a seasonal business focused on those sunny days of northern hemisphere summer, the 3rd quarter. The company has reported increasing 3rd quarter earnings over a year earlier for the last two years.

The company has been profitable for at least the last 12 quarters, with 10 upside earnings surprises and two to the downside.

Institutions own 70% of shares, and the price is running above operational parity. It takes $1.62 in shares to control a dollar in sales.

CCL on average trades 3.1 million shares per day, enough to support a good selection of options strike prices. Open interest tends to run in the three figures, and the bid/ask spreads are moderately narrow.

These are options I can work with.

Implied volatility stands at 25%, at the bottom of the six-month spread. It has been running sideways the last few days after declining sharply from June along with the price of the stock.

Options are pricing in confidence that 68.2% of trades will fall between $31.12 and $36.06 during the next month, for a maximum gain or loss of 7%. Options volume is running well above its five-day moving average, by 170% for calls as 18% for puts.

The stock is trading at the top of today's fair-price zone, which runs from $33.17 to $33.61. The zone encompasses 68.2% of today's trades surrounding the most-traded price, $33.44.

CCL next publishes earnings on Sept. 17. The stock goes ex-dividend on Aug. 22 for a quarterly payout yielding 2.98% annualized. Traders holding long call options are almost certain to see those options exercised prior to the ex-div date.

Decision for my account: The chart suggests that CCL is a reasonable bull play. The financials aren't the greatest, but I wouldn't play as a long-term holdings.


I've opened a position in CCL as a bull put credit spread expiring in August, long the $31 put and short the $33 put. That structure is profitable down to $32.61, near where the current leg up began, and potentially has a maximum yield of 10% of risk. 


I had to give a bit in order to get a fill, an din the end it wasn't a very good fill. I would have preferred a better yield, although 10% is a reasonable risk/reward ratio in my book for a four-week 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.

Things are going ANN's way

Things are starting to go Ann's way. That's Ann Inc. (ANN), which sells women's clothing through its Ann Taylor and LOFT Outlet stores.

ANN began rising significantly on July 12 in what appears to be the end of a mid-term downtrend that carried the price from $29.81 on April 18 down to $24.17 on June 27.

Since then the price has carried to up to today's high (so far) of $26.54, or 10% above the swing low.

Big picture, ANN's recovery from the single-digit depths of the recession reached $32.49 in April 2011, and since then the price has traded within a somewhat sloppy range of around $22 to $30. Three times this year the price has reversed just short of $30. Even if that happens a fourth time, that still gives another 11% or so before the price hits the ceiling.

Ann Inc. operates 953 stores in 46 states, Washington, D.C. and Puerto Rico. The New York City company cultivates an image of classic women's apparel for career and casual, but without the stuffiness.

One promo reads, "Must-have looks: Sexy, sophisticated, sure to raise temperatures." That may be classic, but it's not my grandmother's classic.


Not only is ANN's chart perking up, the stock was added today to the Zacks top-buy list put together by the stock analysis company. Zacks makes a few of its picks available for free to everyone, and ANN was in today's batch.


I haven't read Zacks' analysis yet, to ensure my analysis is independent. You can read it here.


Enthusiasm for ANN among analysts stands at 15%, not especially high but room for improvement is good. The enthusiasm rating is unchanged from a month earlier.

Certainly there are good financial reasons for analysts to be happy with Ann Inc. The company reports return on equity of 24% with no long-term debt. That's a growth-stock profile.

Annual earnings have risen the past two years after two years of recession losses. Quarterly earnings are all over the place, without a trend. The closest thing to a seasonal peak is the 3rd quarter, but it doesn't stand out particularly from the 1st and 2nd quarters.

The company has shown a profit at least the past 11 quarters, with 10 upside earnings surprises and one to the downside.

Institutions are heavily invested, owning 95% of the shares. Yet the price is a bargain. It takes only 57 cents in shares to control a dollar in sales.

ANN on average trades 885,000 shares a day, meaning the stock, while liquid, is less so than most that I trade. Yet the options have a good selection of strike prices, with three-figure open interest and not-too-horrible bid/ask spreads. I could comfortably trade this options grid.

Implied volatility stands at 43%, about the middle of the six-month range. It has been zig-zagging gently upward since late June.

Options are pricing in confidence that 68.2% of trades will fall between $23.57 and $30.17, for a maximum gain or loss of 12%.

The stock is trading near the top of the five-day fair-price zone, which encompasses 68.2% of trades surrounding the most-traded price, $26.17. The zone runs from $25.07 to $26.94.

The present zone was mainly defined by a sideways trend from Friday through Tuesday, so if the present breakout from that very near term range is valid and backed by volume., a new fair-price zone will quickly be established.

Ann Inc. next publishes earnings on Aug. 17.

Decision for my account: The earnings announcement date suggests a short-term trade, such as a bull put vertical spread for credit. I would structure it as a trade expiring in August, long the $26 put and short the $24 put. 


If the price falls below $26.40 then than casts doubt on the break-out. The vertical I described is profitable at expiration down to about $25.50. The maximum profit on risk is 27%.


I like the chart and especially the financials. The liquidity is a concern, and the way to test that is to put in a limit order and see if it gets filled.


As it turns out, I had to lower my asking price in order to get a fill, reducing the potential profit to 25%. Not shabby, although I hate to give up profit. And I now have a position in ANN.


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.

JPM: Down but not out

I made a trading a mistake yesterday and that I corrected this morning for a 6% gain -- pretty good for an overnight position.

Jamie Diamond, when he was head of JP Morgan Chase & Co. (JPM), made a trading mistake, and the latest estimate of the company's loss is $7 billion, which is about 5% of the banking company's market capitalization.

It's always good to outperform the pros, even if it must credited to fumble-fingers and dumb luck.

JPM's chart fell on bad times last spring, beginning a decline from $46.49 on March 27 that carried all the way down to $30.83 on June 4.

Since then, despite all the congressional storminess over JPM's bad trade, the price has against started moving upward, hitting a leg high of $37.03 on June 21, zagging down to $33.81 -- a higher low -- on July 9, and then rising again to $36.20 -- a lower high -- on July 13.

It has since retraced a bit and is now trading at around $34.88.

The chart is ambiguous, and will be resolved when the price either  bumps above $37.03 or stumbles below $33.81.

Headquartered in New York, JP Morgan Chase is the largest bank in the U.S. by assets and the second-largest by revenues, after Bank of America (BAC). Also, the 52nd largest company in the world.

JP Morgan Chase reports return on equity of 10% with a high level of long-term debt, nearly four times equity, significantly higher than that of competitors Bank of America and Wells Fargo (WFC).

Annual earnings fell tremendously in 2008 as capitalist finance collapsed, and then since recovered, by 75% in 2010 and an additional 13% in 2011.

Quarterly earnings have been inconsistent, without a trend. The company has been profitable for the last 12 quarters, showing 11 upside earnings surprises and one to the downside.

Institutions own 76% of shares and have bid up the the price to more than double sales. It takes $2.17 in shares to control a dollar in sales.

The analyst enthusiasm index for JPM comes in at 25%, unchanged from a month earlier. That's a pretty good level for a company that has been heavily demonized for the past few months, or even years.

JPM on average trades $45.5 million shares a day, which supports a huge selection of option strike prices with very high open interest and very narrow bid/ask spreads.

Implied volatility stands at 31%,k in the lowe rhalf of the six-month range. Volatility fell sharply on July 13 and has since traded near the present lev4el.

Options are pricing in confidence that 68.2% of trades will fall between $31.72 and $38.04.

JPM is trading in the upper section of the five-day fair price range, which runs from $34.02 to $35.33. The range, which is heavily skewed to the upside, contains 68.2% of trades surrounding the most-traded price, $34.19.

JP Morgan Chase next publishes earnings on Oct. 10. The stock goes ex-dividend in October for a quarterly payout yielding 3.44% annualized.

Decision for my account: I would open a bull position on JPM if it were to resume its upward trend -- it has fallen the last two days. I would only do short-term plays -- vertical option spreads, for credit, for example -- rather than anything long term. I also wouldn't be happy doing longer term income options spread, such as a diagonals, because the high dividend makes it more likely that my long call would be assigned.


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.

MON breaks out

Monsanto Co. (MON) has broken above the prior higher high of $83.95 set in January. However, the price remains within a sideways trend that ran from late 2008 through 2009, so if there's any credence to market memory from that long ago, MON faces some serious resistance.

Monsanto is best known for biotech seeds and herbicides that boost productivity in agriculture. The St. Louis, Missouri company is a major player in what opponents of genetically engineered cuisine call "franken-food" and supporters call "the future of eating".

Big picture, MON fell sharply 2008 when the recession kicked in, to a plateau ranging from about $70 to $90. It then fell sharply in 2010 to a post recession low of $44.61.

It has since recovered to nearly double that low price. The January high was followed by a retracement back to $70 -- perhaps no surprise, that's the floor of the 2010 sideways trend -- and then stair-stepped up to today's high of $85.53 (so far), the highest level ever since the price crashed in 2010.

If the $90 ceiling set by the 2010 sideways trend is still in place, that would give MON room for a 6% run-up before resistance. A break above $90 would be very significant on the chart. A retreat below $84 would negate the current breakout.

Analyst enthusiasm is running at 22% -- unchanged from a month ago. That level is positive for the stock, but also gives room for more analysts to jump on board.

Monsanto reports return on equity of 18% with low long-term debt amounting to 18% of equity. Annual earnings grew over the prior year in 2008 and 2009 but stumbled sharply in 2010, the year the stock price crashed. Earnings recovered in 2011 but remain below the 2008/9 levels.

Quarterly earnings are seasonal, peaking in the spring 2nd quarter -- farms, planting season, the seasonality is no mystery. Earnings have accelerated the past two 2nd quarters over the corresponding quarter a year earlier, both with upside surprises.

Of the past 12 quarters, three have shown losses, eight have shown upside earnings surprises and four have surprised to the downside.

Institutions own 83% of shares and have bid up the price to relatively  high levels. It takes $3.27 in shares to control a dollar in sales.

MON on average trades 2.76 million shares a day, sufficient to support a good supply of optoins with narrow bid/ask spreads and high open interest.

Implied volatility stands at 25%, at the low end of the six-month range, and has been stair-stepping lower since early June. Options are pricing in confidence that 68.2% of trades will fall between $79.24 and $91.74.

MON is trading above its five-day fair price range, which runs from $81.88 to $83.37 and encompasses 68.2% of trades surrounding the most-traded price, $82.70. The price is also above today's fair price range of $83.87 to $84.92, with $84.60 being the most-traded price.

Monsanto next publishes earnings on Oct. 3. The stock goes ex-divided in October for a quarterly payout yielding 1.4% annualized.

Decision for my account: Good chart, good financials for a momentum trade. Longer term, I think the numbers support a growth trade, but the stock is over-priced for a value postion.


But I'm a momentum trader, so I've opened a position in MON. I structured it as a bull put credit spread expiring in August, long the $82.50 put and short the $85 put. The position has a potential profit of 55% of risk and is profitable at expiration down to about $84.12.


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 Week Ahead: A grab bag and Bernanke

This is a grab-bag week -- retail, real-estate, inflation, industry --on the economics report calendar, with the added bonus of Fed Chairman Bernanke delivering his semi-annual report to Congress.

The housing market reports will be scrutinized for the first glimmering of a recovery; the retail and industrial for first gleanings of a falter; Bernanke, for the first glittering of new quantitative easing.

The retail sales report kicks off the week on Monday at 8:30 a.m. Eastern.

Tuesday sees inflation -- the consumer price index -- at 8:30 a.m., followed by industrial production at 9:15 a.m.

The real-estate reporting comes in pieces, beginning with the Homebuilders housing market index on Tuesday at 10 a.m., followed on Wednesday by housing starts at 8:30 a.m. and on Thursday by existing home sales at 10 a.m.

The starts and sales are the two major reports, starts because they point to increased confidence in the housing industry that things will get better, and existing-home sales because they point to more confidence and access to credit among the public.

Fed Chairman Bernanke makes two appearances on Capitol Hill, Tuesday and Wednesday, both at 10 a.m., followed on Wednesday by release of the Fed's Beige Book report of conditions in each of the Federal Reserve districts.

Any Bernanke appearance has major potential, and recent spotty weakness in the economy means there will be heightened scrutiny of his statements. But honestly, he has run such an open Fed compared to his predecessors, I don't see him using Congress as a venue to signal changed intentions. He has many ways within his own agency to get the message out.

Leading indicators out this week:

Wednesday: Building permits for new private homes from the housing starts report at 8:30 a.m.


Thursday: Weekly unemployment compensation claims at 8:30 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.


Also on Thursday, at 10 a.m., the Conference Board's index of leading indicators, a compilation of leading indicators issued in the past month. The index is not considered to be a major report, but there are those of us who love it.

Other reports of interest:


Monday: The Empire State manufacturing survey of New York conditions, at 8:30 a.m., and business inventories at 10 a.m.

Tuesday: Treasury's report on international capital flows into and out of the United States at 9 a.m.

Wednesday: Petroleum inventories at 10:30 a.m.

Friday, the last trading day before July options expire, is a day with no economic reports. I recommend fasting and meditation.

Trading calendar



By my rules, as of Monday I can trade August vertical and butterfly spreads, the short legs of diagonal spreads, and iron condors, and October single options and straddles. Of course, shares are good at any time.

Good trading!

HD: Riding the sidewinder on Friday the 13th

Home Depot Inc. (HD) experienced a stunning 54% rise from October 2011 into May of this year, from $34.29 to a May 3 high of $52.88.

Then things got interesting. The big box home improvement retailer corrected down to $46.37 on May 21, rose to a new high of $53.28 on June 20, and from June has been ensnared in a sideways trend running from about $51 to $53.

It is now trading at $52, the midpoint of the sidewinder. In the very near term, the price hit the floor of the range on Thursday, and today rose to a higher high -- a very short-term uptrend.

Headquartered in Atlanta, Georgia, Home Depot operates 2,252 stores in the United States and its territories, as well as Canada, China and Mexico. It identifies three segements of customers: the do-it-yourself crowd, the do-it-for-me set, and professionals who buy supplies for their contracting businesses.

As an options trader, I'm a fan of sideways trends. Riding a sidewinder can mean profit just as readily as an directional trend, and sometimes with greater certainty. This is an advantage that stock traders don't enjoy.

HD's price is at a level well below the sidewinder ceiling, yet not so low as to be in danger of crashing through the floor. A rise to the ceiling, even absent a breakout, would be a 2% gain, and a drop to the floor, absent a breakout, would be similar. So just based on support and resistance, the risk/reward ratio is 1:1, excellent odds in my book.

HD is also one of the few big stocks that can be traded without smashing immediately into earnings.  The company publishes on Aug. 14, giving room to to do an August options play, closing it Monday or Tuesday (Aug. 12/13) in the last week of trading prior to expiration.

My trading rules requires new positions be opened at least a month before an earnings announcement or entered into with the commitment to sell before the announcement.

Home Depot reports return on equity if 23% -- growth stock territory -- with a higher level of long-term debt than I like, at 60% of equity. It's not a crippling debt level, but I get nervous over 30%.

Annual earnings crashed in 2008 but have gained steadily since then. In the company's 2011 fiscal year, which ended Jan. 31, 2012, annual earnings exceeded the  pre-crash 2007 level for the first time.

The company's best quarter is the 2nd, covering spring and summer, when repair and construction work peak. The 2nd quarter earnings rose in 2011 over the year-ago quarter. The past nine quarters have all been profitable and showed upside earnings surprises.

Institutions own 72% of shares, and the price is near parity with the pace of business. It takes $1.11 in shares to control a dollar in sales.

My analyst enthusiasm index stands at 26%, up from 21% a month earlier. The index gives positive weight to strong buy recommendations, negative to holds, sells and strong sells, and ignores simple buy recommendations.

HD on average trades 9.2 million shares a day, a level of liquidity that supports an excellent selection of option strike prices with high open interest and narrow bid/ask spreads.

Call options are active, with volume 66% above the average of the last five days. Puts are less active, trading 22% below the average volume.

Implied volatility stands at 22%, about midway in the six-month range, and has been moving sideways for most of June. Options are pricing in confidence that 68.2% of trades will fall between $48.85 and $55.43 during the next month, for a maximum gain or loss of 6%.

The stock is trading in the upper portion of the five-day fair trade range, which encompasses 68.2% of trades surrounding the most-traded price, $51.99. The range runs from $51.58 to $52.32.

Home Depot next publishes earnings on Aug. 14. The stock goes ex-dividend in late August for a quarterly payout yielding 2.23% annualized.

Decision for my account: I like the chart, the financials, the options grid -- actually, there's nothing I dislike about this stock.


Despite the evil omens of Friday the 13th, I've opened a position today, structuring the trade as a bull put spread expiring Aug. 17, short the $50 put and long the $47 put. The position has a 15% potential profit, a risk/reward ratio of a bit better than 7:1, and is profitable at expiration down to a stock price of $49.60, well below the floor of the sideways trend.


Normally with options, I close the Monday or Tuesday of expiration week, which leaves room to get out before Wednesday's earnings report from HD.

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.

GPS: Parsing a near-term correction

It is oh so tempting to ascribe personality to stock charts. Gap Inc. (GPS), which markets clothing and accessories through The Gap, Old Navy and Banana Republic retail stores, has been resting since April, exhausted by a mighty push that saw the stock gain half its value in only a few months.

I can see it now: Gap, sitting on a bench in a San Francisco park, breathing hard -- gasping, really -- as it tries to get its breath back so it can redouble its efforts.

Or not. There are never any guarantees in the markets. Only guesses, trends and gaps.

GPS began its sharp rise on Feb. 1, gapping up 8% from the prior day's close of $19.45. The uptrend ended, or at least paused, on May 1 at a high of $29.23.

Since then, GPS has retraced back to $25.02 on June 4, and since then has begun a gentle rise toward its peak in a series of higher highs and higher lows -- an uptrend.

The last three days have seen a retracement within that uptrend that has remained above the prior low. The uptrend remains in place, and today is showing a hesitation pattern on the chart, with little difference (so far) between the open and the current price.

If that hesitation pattern holds today, and if  GPS sets a higher high tomorrow (compared to today), then I would conclude that the uptrend since June 4 remains in place. A fall below $25.02 would negate the uptrend, removing it from my consideration for a bullish position.

Assuming that I would want to trade. Analysts are pretty down on Gap. Enthusiasm among the 24 analysts tracking the stock is at a negative 21%, the same as a month ago. So a bull position on GPS is runs counter to the consensus.

Not that I always follow the consensus. Analysts have no crystal ball, anymore than I do. The future is opaque to all traders, providing a level playing field for our games.

GPS recommends itself for consideration for reasons removed from the chart and the analysts. We're deep in earnings season. My rules won't let me open a new position within a month of a stock's earnings announcement.

Gap doesn't announce earnings until April 16, giving me a window for a short-term trade.

The company reports return on equity of 25% with long-term debt running at 54% of equity, higher than I like but not crippling. 

Annual earnings accelerated from 2007 through 2010. The 2011 fiscal year, ending Jan. 31 this year, showed a drop below the 2009 level.

Like all retailers, Gap's best quarter tends to be the 4th, covering Christmas shopping. The 2011 4th quarter earnings showed a 27% drop from the quarter before.

But that year-over-year decline came in a quarterly earnings uptrend, which continued in the 1st quarter 2012 with earnings above the prior quarter's. Normally the 1st quarter drops from the 4th. But not this year.

If it were a stock chart, I would say that quarterly earnings are in an uptrend within a correction, having reached 47 cents per share, and that the uptrend will be confirmed if quarterly earnings exceed 60 cents a share.

Each of the past 12 quarters has been profitable and shown an upside earnings surprise.

Institutions own 54% of shares, a bit on the low side for a major player like Gap. The price is slightly below sales parity. It takes 90 cents in shares to control a dollar in sales.

GPS on average trades 5 million shares a day, sufficient to support an adequate selection of options strike prices with narrow bid/ask spreads. Open interest, however, is spotty, concentrated in just a few strikes, suggesting to me that there's some heavy speculative play going on.

Call options are trading at more than double their five-day average volume, and puts at less than half the average volume.

Implied volatility stands at 39%, about midway through the six-month range. Options are pricing in confidence that 68.2% of trades will fall between $23.99 and $30.01 over the next month, for a maximum gain or loss of 11%.

The stock is trading below five-day fair-trade range, which runs from $27.41 to $28.50 and contains 68.2% of trades for the period. The most traded price is $28.01, and the most traded prices today are a tie among $26.98, $26.99 and $27.

Gap next publishes earnings on Aug. 16. It goes ex-dividend in September for a quarterly payout yielding 1.85% annualized. That puts the dividend outside the window of an August options trade, a good thing since a dividend increases the odds of a short option being exercised.

Decision for my account: There's a lot not to like about the GPS: The negative analysts, the long-term earnings trend. But I like the chart, at least if the very-near-term downtrend reverses after today (as discussed in my chart analysis, above). 

I said above that it would take a higher high on Friday to persuade me to trade GPS. The reversal pattern for today is strong enough that I've jumped the gun and opened a position. I structured the trade as a bull put vertical spread expiring in August, short the $27 put and long the $24 put, for an 86 cent credit. The position is profitable at expiration down to about $26.12 and has potential profit of 40% of risk.

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.

WMT: Breakout from a 13-year sideways trend

Wal-Mart Stores Inc. (WMT) is the world's largest retailer by revenue (and third largest corporation in any sector). The Bentonville, Arkansas company's closest competitor for size, the French "hypermarket" Carrefour, only ranks 21st on the big companies list.

The Walmart stores, for many Americans, are an essential landmark in their lives: From the goodies for the Walmart baby registry to clothes, groceries and portable air conditioners for the summer heat wave, Walmart comes through for its shoppers with little style but at very low prices.

WMT is one of the few big companies that can be reasonably traded at this point without colliding with earnings. One of my rules is to avoid opening positions in stocks within a month of earnings, although I will hold existing positions through earnings. 

As a corollary, I avoid entering a position that must be closed just after an earnings announcement, when a price gap can be devastating.

WMT, which announces earnings before the open on Aug. 16, meets my criteria for a short-term play using August options, which expire Aug. 17. I would need to design the position so that it would be closed by Aug. 15 at the latest (and most likely I would close on Aug. 12 or 13.)

One trading consideration is an Aug. 8 ex-dividend date for a quarterly payout yielding 2.21% annualized. That will inevitably cause the price to drop slightly to account for the 40-cent dividend -- nothing massive but still worth avoiding.

The retailer's price has been in a consistent uptrend since May 17, when it gapped sharply upward from $59.35 after a 5% earnings surprise. the price hit an all-time high of $72.58 on Tuesday but is down intra-day today, while remaining within Tuesday's range.

Very long term, WMT has been in a sideways trend since 1999, ranging from around $43 to $63, with numerous breakouts and breakdowns that were quickly corrected. This breakout is significant because it is the only one to exceed the pre-sideways-trend peak of $70.25 that culminated the stock's three-year rise from $9.55.

That level of breakout is no guarantee against a retracement, of course. It does show significant momentum. Volume has been running a few percentage points above levels recorded before the recent uptrend began.

Nor is it a guarantee that the trend will continue. The price has gained 22% since May. Surely most of the money that will be piling into WMT has already piled in.

And frankly, analysts are underwhelmed by the rise. The 22 following WMT show an enthusiasm index of negative 9%, the same as a month ago in the midst of the uptrend and two months ago around the time it began.

Wal-Mart reports return on equity of 24% with a somewhat high level of long-term debt, amounting to 79% of equity.

Annual earnings have risen consistently thought the recession (a pretty good trick for a retailer), although the pace of increase slowed dramatically in the fiscal year ending Jan. 31.

Wal-Mart followed the typical retailer pattern of peak earnings in the 4th quarter. That quarter's earnings have risen consistently for two years, although the most recent had a small downside earnings surprise.

Of the past 11 quarters, nine showed surprises to the upside and two to the downside.

Institutions own 30% of shares -- quite low for a giant company -- and the price is very cheap; it takes just 54 cents in shares to control a dollar in sales.

WMT on average trades 10.5 million shares a day, but even so it has only a moderate selection of option strike prices. Yet the open interest is high and the bid/ask spreads are narrow. The strike selection is adequate for most normal option strategies.

Implied volatility stands at 19%, slightly above the middle of the six-month range. The volatility trend has been sideways since late June.

Options are pricing in confidence that 68.2% of trades over the next month will fall between $67.98 and $75.79, for a maximum 5% gain or loss.

The pace of options trading is about on a par with the average volume of the past five days, with puts slightly more active than calls.

The stock is trading in the upper portion of the five-day fair-price zone, which runs from $70.31 to $72.06 and contains 68.2% of trades. The most traded price is $71.16, although a new, higher most-traded is in the process of being established around $72.01.

As noted above in my timing discussion, Wal-Mart next publishes earnings on Aug. 16. The stock goes ex-dividend on Aug. 8 for a quarterly payout yielding 2.21%.

Decision for my account: I like the chart and the financials. My challenge with WMT is to construct a position that will give some cushion if the price retraces, as seems probable, in the wake of this rapid run-up, while retaining the ability to profit if the price keeps rising.


That means I need a position that gives some up-front return.


One way to play it would be as a covered call, with the premium from sale of the August $72.50 call plus the dividend payment amounting to a 2% gain. The stock can be retained as a basis for future covered call spreads.


Another possibility is a diagonal call, based on a long December $67.50 call option while selling the August $72.50. There's no dividend gain under this strategy, but the premium from the sale of the call amounts to 20%. And there are three more opportunities to sell calls against the the December option.


And of course there's always the short-term, keep-it-simple bull put spread: Sell the August $70 put and buy the August $67.50 put for a potential 28% profit on risk and a guarantee that the position ends in August. This is the only net credit position among the three. The others cost money.


The bull put spread is profitable at expiration down to about $69.45. The theoretical price hit from the dividend is 40 cents, which would cut the current price from $71.88 down to $71.48. Since maximum profit is good down to about $70, then the dividend has no impact on this position (all else being unchanged from where they stand today, a fairly silly assumption).


And I've decided on the the bull put spread position as described above. Just opened it, for a 53 cent credit per contract.


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.