Friday, August 31, 2012

WNR: Bullishness abounds

Western Refining Inc. (WNR) is in the happy position today of having broken above its 55-day high of $27.89 on a chart that by other forms of analysis is also bullish.

That's no guarantee of further joy ahead, of course. But over the week I've dealt with a string of charts giving conflicting signals, so it's nice to have some agreement for a change.

The 55-day breakout (which coincides with the 20-day level) produced a Turtle Trading bull signal, requiring that traders using the system open a position immediately, no questions asked. My summary of the Turtle Trading rules can be found here.

The breakout is the third in a series within an uptrend that began May 16 from $17.54 and reached a swing high today of $27.97. It's a clear uptrend, with a high of $27.89 on Aug. 21, a higher low of $25.72 on Aug. 24, and a higher high of $27.97 today.

Western Refining is an independent crude oil refiner, headquartered in El Paso, Texas, that mainly serves markets in the Southwest and the mid-Atlantic region.

The retail group operates about 200 convenience stores and gas stations in Arizona, colorado, New Mexico and Texas under the names Giant, Mustang, Sundial and Howdy's.

Stock analysts are down on WNR, with a negative 14% enthusiasm score. However, it was negative 33% two months ago, so at least the trend is in a bullish direction.

Perhaps their negative assessment is due to the commodity nature of the business -- crude is crude and gasoline is gasoline. There's little anyone can do to differentiate the product from that of the competition. And the oil industry, of course, is extraordinarily exposed to economic shocks, both in the United States and abroad.

For all of that, Western Refining as some excellent financials: A return on equity of 56% with lon-term debt at 49% of equity, not low but not awful.

Annual earnings took  a huge dive into negative territory as a result of the recession, and only in 2011 did earnings climb out of that deep hole. Four of the last 12 quarters have shown losses. Six have shown upside earnings surprises, and six have surprised to the downside.

There's little in the way of a trend to be seen in the quarterly earnings.

Institutions own 75% of shares, and the price is depressed. It takes only 26 cents in shares to control a dollar in sales.

All in all, the Western Refining financials are a contradiction: Growth stock returns with value-stock pricing, and earnings quirky enough to make the most hardened trader as skittish as a cat.

WNR on average trades 1.6 million shares a day and supports a wide selection of option strike prices, a few with four-figure open interest. The bid/ask spreads are narrow. The front-month at-the-money spread is only 7%.

Implied volatility stands at 40%, up slightly from the six-month low of 36% recorded on Aug. 17. Options are pricing in confidence that 68.2% of prices will fall between $24.70 and $31.10 over the next month.

Option volume is running 12% above its five-day average, with puts leading at 21% abov ethe average, compared to 6% above for calls.

Presently the fair-price zone runs from $27.65 to $27.95 and encompasses 68.2% of transactions surrounding the most-traded price, $27.82. The stock is near the top of the zone with two hours before the close.

Western Refining next publishes earnings on Oct. 29. The stock goes ex-dividend in October for a quarterly paying yielding 1.15% annualized.

Decision for my account: WNR was part of my Turtle Trading pool, so I opened a bull position shortly after the breakout. I played it as long call options expiring in December with a $25 strike price, selling for $4.17 per contract. That gives me about 4x leverage.

The chart structure is clearly showing an uptrend, and that analysis would also prompt me to open a bull position now.

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, August 30, 2012

UPS: Framing the chart

The ecology of sending stuff from here to there is really very simple.

If it's sort of flat, go with FedEx. If it's square or oblongish, go with UPS. If it's junk mail or a birthday card, let the Post Office do it.

 So I found it to be a bit shocking this morning to be awakened by an alert screaming "bear signal" on the stock of United Parcel Service Inc. (UPS).

Their signature-brown trucks pass by my house every day. The economy is recovering, although slower than everyone wants. If ever there were a company that should fall into the slow and steady growth model, it's UPS.

That, at least, is what the story-telling part of my brain says.

The question of UPS, as it turns out, has more to do with how a stock chart is framed than with the merits or demerits of corporate performance.

The signal was a drop below the 20-day low for the stock, a bear signal in the Turtle Trading system. You can read my discussion of Turtle Trading here.

Turtle signals operate at the extremes. And as any experienced trader know, the extremes are where a position either makes a bundle or loses a bunch. The extremes are where trading gets fun, or maybe heartbreaking.

The extreme at this case is the lower boundarya sideways movement that began in late July after a downside earnings surprise, running from about $73.50 to $76.80.

It is a move within a downward correction from a peak of $81.79 set in mid-March.

A Turtle signal has no built-in time frame. The idea is the position lives until it hits a stop/loss or exit level. And under Turtle rules, the trade must be taken. In the case of UPS, I have a stop/loss of  $75.80. As long as that level isn't hit, then I'll continue to hold the position.

Yet I find that most Turtle signals set up a short-term quandary. They happen at the extremes, and can be interpreted either as a breakout or as a set up for a move in the opposite direction.

In the case of UPS, my normal way of framing a chart's narrative would say that the price faced near-term resistance to further decline at $73.51, the low set July 24, and at $72.15, set June 5. A drop below $72.15 would be a powerful argument for the bear case.

A bounce from either of those levels would suggest a swing trade with at least $2 upside potential for a gain of about 2.7%.

Further upside resistance is at the Aug. 15 high of  $76.81 and further at the July 18 high of $80.53.

Note, please, that the Turtle breakout isn't a resistance level according to the normal methods of framing charts. It's just place, of no intrinsic significance. Like a ghost town whose post office was long ago shuttered.

UPS, headquartered in Atlanta, Georgia, ships package for 1.1 million customers each day to 7.7 million recipients in more than 220 countries. It is huge. But, arguably, it has pretty much grown to its limits, at least until Mars or the moons of Jupiter are opened up for settlement.

Analysts treat UPS positively but not as a huge opportunity for explosive growth. It has an enthusiasm rating of 15%, the same as a month ago. In scoring enthusiasm, I add points for strong buy recommendations, subtract points for hod recommendations and worse, and ignore simple buys.

And what a cash cow! United Parcel Service reports return on equity 58%. Yes, that comes at the cost of a heavy load of debt, amounting to 144% of equity. But, I mean, 58%! Any passing fundamentalists are embarrassed on my behalf as I talk  bear signals about a company with that sort of record of management efficiency.

UPS, like everyone else, in 2009 hit a recession low in annual earnings. Earnings tend to peak in the 4th quarter Christmas season, and earnings have risen in that quarter over a year earlier for at least the past two years. Ten of the past 12 quarters have showed upside earnings surprises, and two -- the most recent -- surprised to the downside.

Institutions own 66% of shares -- not oustandingly high -- and the price is a bit above parity. It takes $1.32 in shares to control a dollar in sales.

UPS on average trades 2.3 million shares a day, sufficient to produce a moderate selection of options strike prices with four-figure open interest and narrow bid/ask spreads. The front-month at-the-money calls have a spread of just 2%.

Implied volatility stands at 17%, in the lower half of the six-month range. It has risen to that level from a lower of 14% set Aug. 10.

Options are pricing in confidence that 68.2% of trades will fall between $70.42 and $77.72 in the next month, for a gain or loss of 5%. That's a bit below the volatility of the S&P 500 index, which itself is not especially volatile most of the time.

Options activity is running at 96% of their five-day average volume, with calls having the edge at 1.15% and puts less active at 70%. This suggests that the Turtle bear signal is contrary to the trading consensus at this moment.

The fair-price zone presently ranges from $73.86 to $74.05 and encompasses 68.2% of trades surrounding the most-traded price, $73.97. The current price is a bit above the zone.

UPS next publishes earnings on Oct. 23. the stock goes ex-dividend in November for a quarterly payout yielding 3.08% annualized.

Decision for my account: UPS is part of my Turtle Trading equities pool, so I opened a bear position. I structured it as the purchase of put options expiring next January with a strike price of $77.50. These give me 9x leverage at this point.

If I were trading based on the chart narrative, I would wait for a break below $73.51 to open a bear position, or a bounce from that level to open 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, August 29, 2012

DE: Turtle and triangles

Deere & Co. (DE) popped below its 20-day low near the close of trading on Tuesday, triggering a Turtle Trading bear signal. I didn't take the trade, however, because of an exception built into at least one version of the rules designed to improve success by filtering signals.

The Turtle Trading system (you can read my version of the rules here) is often presented as an example of simplicity itself: The signals are unambiguous, and they must be taken when presented. But then, the tweaking begins. There are filters. There are exceptions. Things are never as simple as they seem.

By the rules I'm following, the filter applies to a 20-day breakout. If the prior breakout was a success, the rules say, then the trade should be skipped.  If it was a failure, then the trade can be taken.

Failure is defined by how the prior trade was exited. If it was because the stop/loss point was hit -- the s/l is defined as double the 20-day average true range from the entry point (or the day's close if the trade wasn't taken) -- then the trade was a failure. If the exit was because the  price crossed the 10-day price extremity in the opposite direction of the trade, then the trade was a success.

There is no filter on the 55-day breakout.

Confusing? Yes. Here's how it worked with DE.

DE's price moved above the 20-day high of $79.69 on Aug. 8 and closed that day at $79.17 with an average true range of $1.82. So the stop/loss was set at above $75.53.

On Aug. 15, after earnings, the price gapped down, opening at $76.11 and then dropping through the 10-day low of $75.75.

Was the trade a success or a failure? The answer is (drumroll): A success (although one that lost money). The 10-day low had risen to a level above the stop/loss. Although both the stop/loss and the 10-day low were taken out, the 10-day low was hit first. So the trade was a success, and todays break  below the 10-day low (now at $73.73) couldn't be taken.

The DE scenario raises the question of how success should be fined. Intuitively, I define success by whether I made money. The trade from Aug. 8 lost $3.42. On the other hand, coaches I've studied under unanimously teach that a trade is judged not by whether it made money or not, but rather whether the trader followed his or her trading plan.

That latter criterion is what I've used in judging the DE trade.

But none of this is magic. There are no rules handed down on graven tablets. Each trader gets to make up the rules for himself or heself. And that is a rule that I will surely revisit in the future.

Turtle alumni will tell you that the rules mustn't tampered with. To which I say, "Balderdash!" Many rules are meant to be broken, and all are meant to be improved.

DE's price has been trading a symmetrical triangle since July (or since February by another measure, or possibly since October 2011). This is a continuation pattern. The nearer-term view would see it as a continuation of a downtrend that began in April 2011. The broader view would see it as continuing an uptrend that began in 2009.

It's ambiguities such as these that lead traders to rigid rule-based systems such as Turtle Trading.

Looking at the fundamentals only, my vote is for a continuing uptrend over time.

Deere & Co., of Moline, Illinois, is the world's leading maker of agricultural machinery: Tractors, combine harvesters, cotton harvesters, bailers, planters/seeders, sprayer and utility task vehicles.

They also have a large chunk of the construction and forestry equipment business, and they make diesel engines and drivetrains for heavy equipment. Plus, lawnmowers and snowthrowers. Oh, and they'll lend you the money to buy this stuff.

So Deere is big enough to exercise great control over its marketplace. It's also big enough to be an established presence, one with few surprises. Perhaps that's why analysts only give it a 6% enthusiasm rating, the same as a month ago. (I score enthusiasm by crediting strong buy recommendations, subtracting holds and worse, and ignore simple buys.)

The company has huge return on equity, 43% in the most quarter, and large debt to along with it, at nearly triple equity.

The recession hammered annual earnings, pressing them down in 2009 to less than half of the prior year's. Earnings have since rebounded, more than doubling in 2010 and gaining another 50%+ in 2011.

The 2nd quarter, reported in May, is the big earner for Deere, as the industries that use its equipment gear up for the higher pace of spring and summer work. The last two 2nd quarters have had earnings higher than their counterparts a year earlier.

Eleven of the last 12 quarters has shown upside earnings surprises, and only one -- the most recent -- has surprised to the downside.

Institutions own 67% of shares, and it takes only 84 cents in shares to control a dollar in sales.

DE on average trades 5.2 million shares a day, enough to support a wide selection of option strike prices with high open interest and narrow bid/ask spreads. The bid and ask for the front-month at-the-money calls are only 1.4% apart.

Implied volatility stands at 25%, a bit above the six-month low of 20% on Aug. 17. Options are pricing in confidence that 68.2% of trads will fall between $69.03 and $79.71 over the next month, for a maximum gain or loss of 7%.

Options are trading at 88% of their five-day average volume, with calls having the edge, at 126% compared to 66% for puts.

Today's fair-price zone runs from $73.48 to $74.09 and encompasses 68.2% of transactions surrounding the most traded price, $73.61. At this writing the price is at $74.37, slightly above the zone.

Deere next publishes earnings on Nov. 21. The stock goes ex-dividend in September for a quarterly paying yielding 2.47% annualized.

Decision for my account: I had pegged DE as a potential Turtle Trade, and so I'll go by the Turtle rules, which means no trade this time. If the price should break below the 55-day low, the filter wouldn't apply, and I would open a bear position. The 55-day low is presently at $72.38.

The triangle at present is at about $79.30 on the top and $73.14 at the bottom, and they'll continue to narrow pending a breakout. 

A break beyond the triangle boundaries would be tradeable, but the question of price target depends upon when the triangle began. That will be determined by the direction of the breakout. 

If it's to the upside, then the triangle began in October 2011 and the target is $40.28 from the breakout point; if to the downside, then the beginning was June 2012 and the target is $20.19 away. Either way, it's a significant distance.

In the very near term, the most recent lowest low was $72.85, and a break below that level would suggest a push down to the next support level, $69.51.

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.

Turtle Trading

Much has been written over the years about the Turtle Trading rules formulated by the commodities speculator Richard Dennis. One of my favorite free explainers of his system is here.

I also recommend these fine books on the subject:



Long-time readers of Private Trader will recall that I used Turtle Trading for a while last year, and then abandoned it, discussing my reasons in two essays, "The Trouble with Turtles" and "Smackdown: Joe Ross vs. the Turtles".

I've recently resumed using Turtle Trading as an element in my strategic mix. After spending nearly a year thinking about it, I've concluded that my earlier problems with the system had much to do with trading psychology.

Let's face it, the wide stop/losses and exit levels required for Turtle Trading can be fear-making.

But in the past year, I've worked with time-based trading vehicles, such as diagonal option spreads, and have grown more comfortable with giving positions room to fluctuate. So, the Turtles are back.

I've written up my own version of the Turtle Trading rules, in the schematic style that I favor. Here the write-up:

Definitions:
  • N: The 20-day Average True Range, a measure of average daily price change.
  • DV: Dollar volatility = N x dollars per point ($1 per point for stocks and options)
  • Unit: 1% of account / DV
  • Breakout: A move beyond a breakout level, either below the lower price channel or above the upper price channel.
  • Breakout level: The 20-day price channel boundary in either direction.
  • Exit level: The 10-day price channel boundary opposite the breakout direction (e.g., lower channel line in the case of an upside breakout).
  • Stop/loss: 2N below the entry price in the case of long position or above the entry point in the case of a short position. If no position was taken, then the stop/loss is calculated using the daily closing price.
  • Successful trade: A position closed by the price hitting the exit level.
  • Failed trade: A position closed by the price hitting the stop/loss.
Unit holding limits:
  • Market (stock and its options): 4 units
  • Closely correlated markets (industry): 6 units
  • Loosely correlated markets (sector): 10 units
  • Direction (long or short): 12 units
Exit rule:

Close a position entirely when either the exit level or the stop loss is touched. If the trade was opened on a move beyond a 55-day price-channel boundary, then set the exit level at the 20-day price channel boundary opposite the breakout direction.

Entry rule:

If the price breaks out, and if the prior breakout resulted in a failed trade, then open a position, otherwise skip the trade. If the price moves beyond a 55-day price-channel boundary, then take the trade whether it was skipped or not.

Adding units:

Add an additional unit to the position at 1/2N intervals (from the fill price) until three additional units have been added (six additions).

Pools:

Three pools are available for trading: The Index Pool consisting of a 17 exchange-trade funds and indexes, the Equity Pool consisting of 345 high-volume equities trading for $15 and higher, and the Forex Pool, consisting of 16 major forex pairs.

A note on technology:

It is important to remember that Dennis formulated his method in the 1980s, before the explosion of desktop technology that has greatly changed traders lives.

He didn't even have a good spreadsheet. His trading conditions in that archaic age were really quite primitive.

As a result of the technology limits Dennis faced, he had to limit the number of trading vehicles to a few commodities and maybe some currencies.

He certainly couldn't contemplate keeping tabs on more than 300 stocks, plus exchange-traded funds and a number of currency pairs.

Contrast that with today, where I can call up stock charts easily, complete with the various price-channel levels used in turtle trading, and then use a spreadsheet to instantly calculate my stop/loss and exit points, as well as the prices that trigger additions to the position.

I can easily set alerts on the charts to tell me when a Turtle Trading breakout has occured.

I will admit, even with modern tools, keeping track of 345 stocks is a bit much. So I've used my usual strategy when overwhelmed by he sheer number of vehicles I want to track. I randomly sliced  the pool into manageable chunks of 16 stocks each, and each day or so I set alerts on those 16 stocks.

When I get an alert, I check to chart to see whether it is valid -- whether the alert level still signals a Turtle breakout -- and then take the trade or pass it, as appropriate.




Tuesday, August 28, 2012

ABC: A bear signal

AmerisourceBergen Corp. (ABC) took a 2.8% dive this morning after news that the drug distributor's chairman was selling shares. The price immediately recovered to near its opening for the day.

In the process of whipsawing, ABC sliced through its low for the last 20 trading days, triggering a Turtle Trading bear signal. (Click here to read my favorite explanation of Turtle Trading and its rules.)

AmerisourceBergen, headquartered in Chesterbrook, Pennsylvania, runs a supply chain of brand-name and generic pharmaceuticals, serving health providers in the United States and Canada. They rank #27 among the Fortune 500.

Any sort of whipsaw move of that magnitude immediately puts me on my guard. On the one hand, it produced a bear signal and because of the retreat I'm able to open a position at a bargain price. On the other hand, what if the decline was just a knee-jerk reaction by brokerage computers and the higher price represents the market's longer-term judgment of ABC.

Ultimately, it comes down to my trading rules. I flagged ABC for Turtle Trading. In Turtle-land, all signals must be taken. My only choice lies in whether or not to include a stock or whatever within the trading universe.

ABC was one of 16 high-volume stocks that I added to my tradeable universe on Monday.

Since July 2011, ABC has been trading a sideways pattern ranging from about $36 up to $40, with a few breakouts on either side. While the Turtle rules are signalling a bearish downtrend, the chart can best be analyzed as a candidate for swing trading, with the trader waiting for a bounce before opening a bull position.

Analysts are collectively 45% enthusiastic about ABC. That's not an awful level, but it's down from 64% a month earlier. The decline was caused by a brokerage changing its recommendation from strong buy to hold.

(I score enthusiasm by giving points for strong buy recommendations, subtracting them for hold and worse, and ignoring buys.)

AmerisourceBergen has a high return on equity -- 25% -- with long-term debt running at 51% of equity -- higher than I like but not overly crippling.

Annual earnings have risen steadily from the 2008 recession low. The 2nd quarter is the best earner  each year, and returns for Q2 have also risen steadily from 2010.

Out of the last 12 quarters, 10 have shown upside earnings surprises and two have surprised to the downside.

Institutional ownership is high, at 92% of shares, and the stock price is way low. It takes just 12 cents in shares to control a dollar of sales.

ABC on average trades 3.2 million shares a day, sufficient liquidity to support a good selection of options with a 10% bid/ask spread for the at-the-money front-month calls. Open interest is running in the four figures just below the money.

Implied volatility stands at 67%, about midway in the six-month range. Today's whipsaw reversed a decline from 80% on Aug. 3 down to 63% on Aug. 27.

Options are pricing in confidence that 68.2% of trades will fall between $30.33 and $44.91 over the next month, for a maximum gain or loss of 19%.

Options are trading 25% above their average volume for hte past five days, with puts running well above calls.

Today's fair price zone runs from $37.41 to $37.81 and encompasses 68.2% of trades surrounding the most traded price, $37.59.

AmerisourceBergen next publishes earnings on Nov. 11. The stock goes ex-dividend in November for a quarterly payout yielding 1.38% annualized.

Decision for my account: As noted in the text, ABC is a Turtle Trading stock for me. So under the rules, I had to take the bear signal. I structured it as the purchase of  January puts with a strike price of $40. The options produce 7x leverage.

If I were trading the chart, I would tentatively treat the retreat from today's lows as a bounce within the sideways range but would wait for a move above today's high of $37.81 before opening a bull position with a $40 target.

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, August 27, 2012

URBN: After the quantum leap

Urban Outfitters Inc. (URBN) is a quantum-leap stock. It was happily trading between $30 and $32 in a laid-back sideways trend when it beat earnings estimates by 29%. Bam! The price leaps to $36.91.

A quantum leap. Like an electron jumping in an instant to a new orbit.

And I'm never quite sure how to trade quantum-leap stocks. It's as though the stock's history has been wiped from memory. As a chart reader, I've left with very little to guide me in making trading decisions.

In the case of URBN, the stock has traded within the range of the quantum-leap day for four subsequent days, which must count as a sideways trend.

Urban Outfitters operates 400 fashion and household products stores and five retail brands: The eponymous Urban Outfitters, plus Anthropologie, Free People, Terrain and BHLDN.

The Philadelpha, Pennsylvania company began with funk, gravitated to bohemian, ironic hipster and kitsch, and now has luxury brands and designer collaborations in its inventory.

URBN has drawn my interest not only because of the quantum leap problem, which deserves discussion, but also because the stock analysis company Zacks is featuring URBN as its publicly available aggressive growth pick today. You can read their write-up here. I haven't read it yet to ensure that my own analysis is independent of theirs.

When the near-term analysis is in doubt, I always look a the longer-term position of the chart.

Although URBN is in a near-term sideways trend (following the leap), the weekly chart shows it to have been in an uptrend from $22.20 in early October, with a correction from the recession-recovery uptrend that began from $16.40 in April 2009. That larger trend peaked at $40.84 in April 2010.

The quantum leap brought the price well above its 55-day high, triggering a bull signal within the Turtle Trading method. (You can read my favorite Turtle Trading explainer here.)

The price has yet to break above the new 55-day high of $37.68. A drop below $34.61 (or so) would end the Turtle bull signal.

Side note: Under the strict Turtle rules, the trader opens a position when the signal comes, not four days later. However, given the magnitude of the move and the fact that the price has not yet risen much above the signal-day entry point, I would be comfortable taking the trade under Turtle rules.

Analyst enthusiasm is running at 4%, a turn-around from a negative 4% a month ago. I score enthsuiasm by subtracting hold and worse recommendations from strong buy recommendations, and ignore the buy recommendations entirely.

Urban Outfitters is showing return on equity of 17% -- not growth-stock territory but sitll quite high. It has no long-term debt.

Annual earnings rose rapidly post recession until 2011, when they dropped sharply, nearly to the 2009 level. Quarterly earnings have never again reached the peaks set in 2010 and this year were in fact declining until the 2nd quarter earnings surprise that prompted the quantum leap.

Of the past 12 quarters, nine have shown upside earnings surprises and three to the downside.

Institutions own 77% of shares. It takes $2.07 in stock to control a dollar in sales.

The ROE and lack of debt are quite attractive for a value play. The lack of earnings acceleration and the high price in comparison to sales are less attractive.

If I were trading for value, I would also look at crowded fashion and household goods sector where URBN earns its living. That's a lot of competition to overcome in search of profit.

On average URBN trades 5 million shares a day, a level of liquidity that supports a great selection of option strike prices with high open interest and very low bid/ask spreads -- only 6% for the at-the-money front-month calls. It is an excellent option trading playground.

Implied volatility stands at 30%, at the bottom of the six-month range. It dropped like a rock on quantum-leap day from a six-month high of 46%. Options are pricing in confidence that 68.2% of trades over the next month will fall between $33.67 and $40.07, for a maximum profit or loss of 9%.

Options are trading at only 14% of their five-day average volume, with puts having a slight edge over calls.

The stock is now trading within the fair price zone, which runs from $36.83 to $37.01 and encompasses 68.2% of trades.

Urban Outfitters next publishes earnings on Nov. 12.

Decision for my account: Quantum leaps make me nervous. I would be comfortable opening a position if URBN set a new 55-day high under Turtle rules. Otherwise, I think not. The low option volume suggests there's not a lot of new money coming in after the leap. The non-trending earnings suggest there may well be ample reason for analysts to bad-mouth the company between now and November. So I'm passing for now, but will keep it on my radar.

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, August 26, 2012

The Week Ahead: GDP, consumer savings, Jackson Hole

This week we get a first look at the 2nd quarter gross domestic product numbers, and also see July's personal income and spending results.

GDP will be released Wednesday at 8:30 a.m. Eastern. It's the first of three increasingly accurate iterations of the 2nd quarter figures. Now, GDP is the great grand-daddy of lagging indicators. But when it falters, it has a huge impact on trader confidence and politics. So it bears watching.

Personal income and outlays are out on Thursday at 8:30 a.m. This is the ultimate consumer-driven-recovery indicator. It tells what we're getting and how much we're spending. Subtract the two, and you'll see how much we're saving. More savings = less shopping-till-we-drop = a more anemic recovery.

Also, the Fed begins its Jackson Hole Economic Policy Symposium.

Leading indicators out this week:

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

The index of consumer sentiment from the University of Michigan/Reuters consumer sentiment study out at 9:55 a.m. Friday. It's important because consumers who lack confidence don't shop till they drop. They pinch pennies, thereby bringing the economy down. Happy consumers bring prosperity.

Manufacturers' new orders for consumer goods at materials, taken from the factory orders report released Friday at 10 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.


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

Other reports of interest:

Monday: The Dallas Federal Reserve Bank's manufacturing survey of Texas, at 10:30 a.m.

Tuesday: The Standard & Poors Case-Shiller home price index, which tracks real estate in 20 metro areas, at 9 a.m.

Wednesday: Pending home sales (that's signed  but not closed) at 10 a.m., petroleum inventories at 10:30 a.m., and Federal Reserve's Beige Book of economic conditions in each region at 2 p.m.

Friday: The Institute of Supply Management's Chicago purchasing manager's index, a survey of conditions in Chicagoland, at 9:45 a.m.

Fedsters

The Kansas City Federal Reserve Bank kicks off its closely watched summer retreat at Jackson Hole Wyoming on Friday. There will be a speech by Fed Chairman Ben Bernanke, Friday at 10:30 a.m.

Also, two on Monday: Cleveland Fed Pres. Sandra Pianalto, a Federal Open Market Committee member, speaks in Ohio at 12:15 p.m., and Chicago Fed Pres. Charles Evans, an FOMC alternate, speaks in Hong Kong at 6:15 p.m.

Trading calendar

By my rules, as of Monday I can trade September vertical, calendar and butterfly spreads, iron condors and the long legs of diagonal spreads, as well as December single options and straddles. Of course, shares are good at any time.

My schedule

I'm back from my month of travel in East Asia but have been laid low by major jet lag. I expect to resume a normal posting routine this week, unless the jet lag is laggardly in going away. (I have become a strong advocate of a single time zone for the entire world, preferably based on U.S. Pacific time.)

Good trading!

Wednesday, August 22, 2012

PCG: To bounce or not to bounce

Pacific Gas & Electric Co. (PCG) is that most boring of market creatures, a utility company. It provides electricity to 5.2 million customers and natural gas to 4.3 million in the northern two-thirds of California. Its headquarters is in San Francisco.

I'm looking at PCG as a bear play because the price broke below its low of the last 20 trading days. Under the Turtle Trading method, that's a bear signal. (Click here for a discussion of Turtle Trading.)

Frankly, the chart could just as easily prompt a bull call since the price is at a support level and can be seen as primed for a bounce.

PCG began an uptrend from $37.92 in late November 2011 that carried the price up to $47.03 on Aug. 1. From that point, the price reversed sharply in the run-up to the most recent earnings announcement, falling to $44.28 on Aug. 16.

Since then it has traded below that day's high in a generally sideways direction. Today's low of $44.16 (so far) is the first trade below the July 24 $44.17 low that kicked off the most recent leg up.

A penny down is within the normal jitterbugging of a stock chart, so I don't set much store by it. A move above $45.40, a significant pause-point in the decline, would suggest that a bounce was underway. Further downside progress would suggest a continuing decline.

Analysts are showing 47% negative enthusiasm for PCG. The metric gives positive weight to strong-buy recommendations, and ignores hold and lower. Buys are ignored.

(There has to be a better word than "negative enthusiasm" -- "fear and loathing", perhaps?)

On the books, Pacific Gas & Electric looks like a reasonably well-run company. Return on equity is 12%. Debt stands at 93% of equity, higher than I like to see for a bull play but not a killer level.

Annual earnings took a dive in 2010 as the recession took hold and continued to tumble in 2011, using earnings that include non-recurring items. If non-recurring items are removed, then annual earnings have risen steadily from at least 2009 onward.

Quarterly earnings consistently peak in the 2nd and 3rd quarters, which include the summer months. Those quarters rose consistently in 2011 and 2012.

Institutions own 74% of shares. The price is slightly above sales parity. It takes $1.25 in shares to control a dollar in sales.

PCG on average trades 2.3 million shares a day.

That liquidity ought to support a better options selection, which is pretty abysmal. The front months offers only nine strike prices at $5 intervals. Only one call strike shows three-figure or better open interest, although three of the put strikes are in the triple digits.

The front-month at-the-money put has a 21% bid/ask spread, which is high.

The options are tradeable -- barely -- but lack sufficient breadth of liquidity for spreads.

Implied volatility stands at 10%, near the six-month low set Aug. 20. It began a sharp decline on Aug. 1. Options are pricing in confidence that 68.2% of trades will fall between $42.99 and $45.57 over the next month.

Options are trading at only 12% of their five-day average volume, with a huge discrepancy between calls, at 7%, and puts at 42%. I wrote above that the chart could called either bull or bear. Options traders, obviously, are coming down heavily on the bear side.

Today's fair-trade zone runs from $44.17 to $44.28, encompassing 68.2% of trades surrounding the most-traded price, $44.23. The five-day zone runs from $44.19 to $44.81, with the most-traded price at $44.49.

Pacific Gas & Electric next publishes earnings on Nov. 11. The stock goes ex-dividend in September for a quarterly payout yielding 4.1% annualized.

Decision for my account: If I were to follow the bull case for trading PCG, I would wait for a bounce above $45.40. I've chosen to follow the bear case because of the Turtle Trading signal. Also, the options volume skew to the put side buttresses the bearish case.

I've bought put contracts expiring in December with a $45 strike price and a stop/loss (under Turtle rules) of $45.37.

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.

Saturday, August 18, 2012

The Week Ahead: Durables and Homes

Durable goods and home sales headline the week's economic agenda.

Existing home sales, out Wednesday at 10 a.m. Eastern, account for the greater part of the market, especially with the glut of homes left over from before the bubble burst.

The companion report, new home sales, will be released at 10 a.m. on Thursday.

Durable goods orders -- for big ticket items that last a long time -- will cap the week at 8:30 a.m. Friday.

Leading indicators out this week:

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

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.


The index of consumer expectations from the Reuters/University of Michigan consumer sentiment report, at 9:55 a.m. on Friday.

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

Other reports of interest:

Wednesday: Petroleum inventories at 10:30 a.m., and Federal Open Market Committee minutes from the Aug. 1 meeting at 2 p.m.

Trading calendar

By my rules, as of Monday I can trade September vertical, calendar and butterfly spreads, iron condors and the long legs of diagonal spreads, as well as November single options and straddles. Of course, shares are good at any time.

Good trading!

Monday, August 13, 2012

TRAK: Dueling analyses

DealerTrack Holdings Inc. (TRAK) fell below its 20-day low on Monday, a bearish entry signal for traders following the Turtle strategy. (Click here for a pdf file of the rules.)

The breakout came during a sideways pause following a rapid rise from $14.01 in early October 2011 to a swing high of $31.98 on May 10. The sidewinder has run from about $27.50 to $31.75, with the occasional foray further on either side.

What immediately jumps out is the discrepancy between the Turtle momentum signal and standard trend analysis.

Trend analysis pegs TRAK as being in an uptrend over the mid-term. Near term, the price has risen from a low of $25.20 set June 12 to a high of $30.77 on July 5, a level that it has retreated from slightly.

The near-term price movement suggests the possibility of a failure in the uptrend -- the reversal came below the $31.98 swing high -- but it would take a drop below $25.20 to thrown the near-term into a downtrend.

Turtle analysis says that a breakout  below the 20-day low, $27.82, must be taken as a bear play, with an initial stop/loss set at around $29.56 or above (the stop depends upon the trader's entry price).

The 55-day low, a more powerful momentum signal in the Turtle vocabulary, stands at $25.20. A push below that level would bring both near-term trend analysis and the Turtle analysis into line.

DealerTrack Holdings provides online software applications used in managing and marketing an auto dealership and associated service and finance operations. The Lake Success, New York company serves 17,000 dealers and more than 1,000 lenders.

Bottom line: They're a player.

Analysts swing to the negative side in looking at DealerTrack's business, unsurprising when considering an industry that is deeply vulnerable to economic downturns and consumer angst.

Analyst enthusiasm for TRAK is running at negative 25%, the same as a month earlier. I calculate enthusiasm by giving positive weight to Strong Buy recommendations, ignoring Buys, and giving negative weight to Holds, Sells and Strong Sells.

DealerTrack shows return on equity of 7% -- not the mark of a high flyer -- with long-term debt running at 28% of equity. The company showed its first post-recession profit in 2011 following two  years of losses.

Quarterly earnings vary from quarter to quarter -- there is no trend. The last 12 quarters have all shown positive results, and 10 have produced upside earnings surprises, with two surprising to the downside. The 3rd quarter of 2011 and the 2nd quarter of 2012 were both stand-out earnings peaks.

Institutions own nearly all of TRAK's shares, and they've bid up the price to a premium level. It takes $3.24 in shares to control a dollar in sales.

On average TRAK trades 271,000 shares a day. That level supports only a limited choice of options with low-to-non-existent open interest. The spread for front-month at-the-money calls is 13%, and for puts, 12% -- not low but also not punishingly high.

Implied volatility stands at 49%, about the middle of the six-month range. It has been fluctuating in a sideways band since late July.

Traders are pricing in confidence that 68.2% of trades will fall between $24 and $31.92 over the next month, for a 14% potential gain or loss.

Options trading on Monday can be best characterized as schizophrenic. Option volume is running at 1.5% of the 5-day average. While calls are trading at 3.2% of average volume, puts are at 28%. Neither level is hugely active, but the puts are trumping the calls by a fair margin.

DealerTrack next publishes earnings on Nov. 5.

Decision for my account: Working purely from trend analysis, I would count TRAK as a probable bull play on any move above $30.77. By the Turtle analysis, of course, there is no need for discussion: There was a signal, and the bear play must be taken. End of story.

One project I've had in progress this month is to formulate rules and methods for again bringing Turtle trading into my strategy mix. I'll post more on that near the end of August, when I've returned to the States from my travels in East Asia.

With that project in mind, I've chosen the Turtle path for TRAK and opened a bear position. Although option selection and open interest are unacceptably low for complex spreads, the Turtle method uses unhedged positions. So I've simply bought put options expiring in January with a $35 strike price.

  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, August 12, 2012

The Week Ahead: Prices, retail, industry and housing

Prices, retail, industry and housing dominate the week's econ agenda. Plus, this week sees another installment of my personal favorite, the index of leading indicators.

Prices, AKA inflation, or maybe deflation or possibly stagflation -- no one is entirely sure what sort of 'flation reigns supreme these days -- will come in two installments: The producer price index on Tuesday and the consumer price index on Wednesday, both at 8:30 a.m. Eastern.

The consumer price index generally gets headlines, although with inflation so low -- it was at zero percent last month -- the headlines are in general barely worth a glance, unless the consensus estimate is beaten by a significant margin.

Lower prices prompt higher sales, which show up in the government's retail sales figures, out at 8:30 a.m. on Tuesday. This is a key component in the shop-till-we-drop school of economics, which says that only robust consumer spending can keep us from the doldrums.

Higher sales can be a component in decision making by industrial managers, which shows up in industrial production statistics released on Wednesday at 9:15 a.m. This Federal Reserve report has a wealth of information to help analysts judge whether industry is ramping up production in anticipation of a recovery or sagging down into the doldrums (see above).

And if consumers are happily shopping and industrialists busily manufacturing, then can be the builders lag far behind in their building? Housing starts will be announced at 8:30 a.m. on Thursday. A house is started when the first shovel hits the dirt. Builders don't start new houses unless they think they can sell them, so the figure is in many ways an assessment of builder thinking.

Leading indicators out this week:

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

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.


The index of consumer expectations from the Reuters/University of Michigan consumer sentiment report, at 9:55 a.m. on Friday.


And also on Friday, at 10 a.m., my favorite look-ahead of the economic reporting cycle: The Conference Board's index of leading economic indicators, a collection of leading indicators, such as those listed in this section, smushed into an index.

Since August the leading indicators have been in a long-term rise since their recession low in 2008. However, the month-over-month change has been stairstepping downward  since November and in May and again in July dipped into negative territory.

The leading indicators are broadly accurate in depicting the future course of the economy, although not sufficiently accurate for detailed trading. If the leading indicators should start to decline in a serious way, I would take that into account as I formulate my strategies.

With all of that, I also like to keep an eye on the Baltic dry index of world shipping, updated daily.

Other reports of interest:

Tuesday: Business inventories at 10 a.m.

Wednesday: The Fed's Empire State manfacturing survey at 8:30 a.m. (conditions in New York), Treasury's international capital at 9 a.m.,(foreign inflows and outflows of capital), the housing market index at 10 a.m. (homebuilders' assessment), and petroleum inventories at 10:30 a.m.

Thursday: The Philadelphia Fed survey of business conditions in the mid-Atlantic region, at 10 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 September vertical, calendar and butterfly spreads, iron condors and the long legs of diagonal spreads, as well as November single options and straddles. Of course, shares are good at any time.

Good trading!

Sunday, August 5, 2012

The Week Ahead: International trade

International trade -- how much more we're buying from abroad than other countries are buying from us -- tops the list of econ reports during a very slow week. The report will be out at 8:30 a.m. Eastern on Thursday.

Lower oil prices have been narrowing the trade deficit of late, so that volatile daily market may be a better indicator of how this part of the econ picture is faring.

It is possible that two appearances by Fed Chairman Ben Bernanke will trump international trade in market impact. Bernanke appears before two groups, a conference of researchers into income and wealth at 9 a.m. Monday and by video to a town hall meeting of educators from across the country at 2:30 p.m. Tuesday.

Given Bernanke's open and disciplined approach to messaging, I would be surprised if he committed news. He has set up many mechanisms to signal his money supply goals from within the Fed, and really doesn't utilize outside groups for messaging purposes.

Leading indicators out this week:

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

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: Labor efficiency (productivity and costs), at 8:30 a.m., and petroleum inventories, at 10:30 a.m. Also, the 10-year Treasury note auction at 1 p.m.

Friday: Import and export prices, a measure of how competitively American goods are priced compared to the competition, at 8:30 a.m., and the Treasury budget, which tells how large the federal budget deficit is, at 2 p.m. The latter report will be the occasion of political messaging.

Trading calendar

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

Good trading!

Wednesday, August 1, 2012

YHOO: Trading a raggedy range

Most people don't think of Yahoo! Inc. (YHOO) as their first choice when it comes to the daily task of searching for stuff. It's the kind of company where my first thought is, "It was a big deal in its day".

Yahoo!, of course, is still a big deal: A large-cap company worth $19.6 billion on the market with its fingers in all sorts of global information pies.

Yet it's not anybody's idea of a hot stock. Return on equity is a mere 9%, earnings are all over the map, and the company has been going through CEOs like Larry King goes through wives. The former radio and CNN TV interviewer is listed in Wikipedia as having married eight times. Yahoo! has seen eight CEOs since 1995, four of them this year alone.

YHOO is trading at the upper edge of a range that has been in place since September 2011, running roughly from $14.75 to $16.50, with short-lived breakouts to either side.

Viewed more narrowly, YHOO is in an uptrend from the March 13 opening at $14.54. It's very messy uptrend, one that inspires little confidence in the momentum of the price. Analysts have no enthusiasm for the stock, giving it an enthusiasm index of negative 54%, unchanged from a month earlier.

Why even look at Yahoo!? Two reasons: 1) It's a major player that produces a fair share of financial news in the Internet sector, and 2) it will either break above its range or reverse, and there's money to be made trading either way.

The range ceiling is raggedy. I think the best focus is a spike on June 26 up to $16.35 that was immediately reversed, causing the stock to close that day at $15.35. That's a huge intra-day range, and one that I would treat as significant.

So I see a break above $16.35 as being a signal to open a bull position.

Looking more minutely, YHOO on July 27 hit a high of $16.17 which it immediately pulled back from. It opened the next day at $16.15 and declined steadily from that level throughout the day. So a persistent break above $16.17 would certain look to be the start of some upside momentum.

July 31 and Aug. 1 bounced a few cents above $15.80. A move below $15.80 would suggest a retrenchment back toward the sidewinder floor, appropriate for a bear play.

Despite Yahoo!'s corporate governance issues, the company is very light on long-term debt, which amounts to only 1% of equity.

Institutions own 66% of shares, and the price has been bid up to where it takes $3.89 in shares to control a dollar in sales. That sort of bid up unsupported by the finances is a two-edged sword: I can see it as meaning the stock is too expensive to bother with, or I can judge it as a  indicator that a lot of money out there has a positive view of YHOO's prospects, whatever the analysts might say.

YHOO on average trades 14.6 million shares a day and so has a fine selection of option strike prices with high open interest and narrow bid/ask spreads. It's suitable for a wide range of option strategies.

Implied volatility stands at 25%, near the bottom of the six-month range. Options are pricing in confidence that 68.2% of trades will fall between $14.83 and $17.15 over the next month.

Options on Aug. 1 were trading at 88% of their five-day average volume, with puts having 90 percentage point advantage, at 152% of the average volume.

YHOO closed Aug. 1 near the middle of that day's fair-price zone, which encompassed 98.2% of trades surrounding the most traded prices, $15.98 and $15.99.

Yahoo! next publishes earnings on Oct. 18.

Decision for my account: Odds are good that I won't trade YHOO. I want to keep my speculative money out for the next couple of weeks as I figure out my strategy for September diagonal spreads.


If I were trading, I would look to the breakout and reversal levels that I discussed above: $16.17 for the start of a breakout, $15.80 for the start of a reversal.

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.