Monday, September 10, 2012

WFC: Ongoing head fake

The banking giant Wells Fargo Co. (WFC) is an ongoing head fake. It broke above its 20-day high of $32.45 on June 15, rose at a shallow pace until Aug. 1, and then tripped below the sell point, going for $32.95.

I guess a 1.5% profit isn't something to sneer about, but honestly, I'd like something more for six-week's work.

Last Thursday WFC again broke above its 20-day high, $34.76,  and immediately pierced the 55-day high, $34.80, on a powerful upward push stretching 2.9%. And as of this writing, about three hours before the close, $34.80 is precisely where it stands, having gone no where since its spectacular move.

The breakouts in June and last week each triggered buy signals under the trend-following Turtle Trading method, which you can read about here. And each illustrates a weakness of trend following: Often the signal to act on a trend follows the end of the trend, or at least the bulk of the trend's course.

Trend followers freely admit that their methods rules in many losses -- that's why they have strictly defined stop/loss rules. But, they add, the successful trades tend to be wildly so, and that makes up for the false positives.

Wells Fargo is as a regional bank, but I don't buy that. Headquartered in San Francisco, California, it is a multinational behemouth, the second largest U.S. bank in terms of deposits and the 23rd largest company in the country.

Very large, market dominating companies tend toward stability, not only on their balance sheets but on their stock charts as well. WFC has traded between $32.40 and $34.60 since March, with one major breakdown.

Post-recession, it has hit three peaks -- $34.25 in April 2010 and February 2011, and $34.59 in March 2012. Friday's high of $35.19 marked a new peak.

Whatever the signals, WFC is a stock that's going nowhere fast. Which seems odd, given the volume of its cheering squad. Analyst enthusiasm is running at 56%, unchanged for the past two months.

Annual earnings have risen for three straight years since the 2008 recession hit. Quarterly earnings have shown a steady increase since the 1st quarter of 2010. Out of the last 12 quarters, 10 have shown upside earnings surprises, and only two have surprised to the downside. All have made money.

The company reports return on equity of 13%, with long-term debt at 91% of equity. Banks tend to be debt heavy, so that's not a concern for me.

Institutions own 76% of shares, and the price has been bid up so that it takes $2.22 in shares to control a dollar in sales.

These are good figures. It's not Google or Apple, but its growing and good. I can only guess that outside factors -- fear of stimulative inflation and euro-fright -- underlie the failure of the stock to establish a clear uptrend.

WFC on average trades 18.8 million shares a day, making it one of the most liquid stocks listed on the U.S. exchanges. It has an adequate selection of option strike prices, with open interest up into the five figures and very narrow bid/ask spreads, running 1% for the front-month at-the-money calls.

Implied volatiity, at 23% is about a third of the way above the low in the six-month range. It rose from early August but then stumbled in early September. Options are pricing in confidence that 68.2% of trades will fall between $32.52 and $37.22, for a gain or loss of 7%.

This is not a lot of volatility. Arguably, WFC lends itself less to trend following and more to strategies that profit from the passage of time, such as short option spreads.

Option traders are active. The volume is running 62% above its five-day average, with calls leading at 73% above average, vs. 50% above for puts.

The fair-price zone runs from $34.72 to $34.85, encompassing 68.2% of transactions surround the most-traded price, $34.83. The stock price has been toying with the upper end of the range for much of the day.

Wells Fargo next publishes earnings on Oct. 12. The stock goes ex-dividend in November for a quarterly payout yielding 2.52% annualized.

Decision for my account: WFC was in my Turtle Trading equities pool, so I opened the position on Thursday when I got the signal. If I were coming to it late, today, I would still open a position. The price is at the breakout point and hasn't moved far above for dropped below.

Using traditional trend analysis, I would want to see a couple of day's rise above Friday's high of $35.19 -- the establishment of a clear trend -- before opening a position.

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.

No comments:

Post a Comment