Monday, October 8, 2012

AIG: On the happy track?

American International Group Inc. (AIG) is a multinational insurance company built on the wreckage of one of the biggest casualties of the collapse of capitalist finance in 2008.

One unit in the company had traded heavily in credit-default swaps securities. When that market turned sour, AIG came up short of money to keep operating, a condition that pushed it to the brink of failure. It survived only thanks to the support of the U.S. government, and has been selling off assets like crazy to repay that support.

Yet the six-month chart depicts a stable company that's on the happy track. It hit a low of $27.18 on June 4, but rose gently to a high on that chart of $35.71 today. That new high pushed the price above the 20- and 55-day day highs, triggering a Turtle Trading bull signal.

It is true that the signal came on a strange day, a faux holiday in the U.S. markets, where bond trading is suspended in honor of Christopher Columbus but stock trading continues in honor of hope, fear, profit and loss.

The upward push began Oct. 1 at $33.02, and continued to rises for for of the five ensuing days.

In terms support and resistance, AIG is trading above any level it has seen stretching back to the spring of 2011. However, there is much older resistance at this level tracing back to the catastrophic fall in price in late 2008.

With the Turtle rules these days I'm using a couple of filters. I want to ensure that when I buy, it is beyond the breakout point. If the price has pulled back, then I'm not interested. And I want to relative strength index (RSI) to moving in the direction of the trade, yet not be beyond the overbought and oversold points, above the 70 level for bull positoins or below the 30 for a bear position.

AIG met those criteria. The RSI stands at 65 and has been rising since Sept. 28.

In the past I've also looked at the force index, which uses volume as part of its analysis, as an additional filter. The one-day half-hour index was rising the first hour of trading,but has since declined.

AIG pushed above the fair-price zone in the first 90 minutes of trading. The zone runs from $35.07 to $35.40 on a one-day 30-minute chart, a range that encompasses 68.2% of transactions surrounding the most-traded pricde, $35.23.

Subsequent trades are concentrated on the $35.54 level, but it has a long way to go before it rivals the $35.23 level. The analysis is bullish, but points to somewhat weak momentum so far.

American International Group has a substantial following of analysts, who are in the aggregate neutral on the stock. The enthusiasm index is a goose egg, zero. That's down from three months ago, when enthusiasm stood at 6%.

And truly, AIG's financials aren't entirely impressive. Return on equity is a mere 3% -- you can do that well with the yield on any decent dividend-paying utility. Long-term debt stands at 71% of equity, much higher than I like, especially with such a low ROE.

Since rejoining the world of publicly-traded companies in 2010, AIG's quarterly earnings have been a mixed bag, with four losing quarters. One of them, the first after it came out of receivership, was a huge write-down resulting from the company's near failure.

But of the 11 quarters, seven showed a profit, including the three most recent, but without any acceleration of earnings.

Seven quarters showed upside earnings surprises, and four surprised to the downside.

Institutions own just 36% of shares -- the company's liquidity crisis spooked them -- and the price is below par. It takes just 79 cents in shares to control a dollar in sales.

At this point, I'll interject that given AIG's history and condition, it seems like madness to open a bull position in its stock. But the Turtle strategy is quite rigid in its rules, and AIG met the criteria. The chart doesn't show a propensity of sudden collapses, so that's an argument in favor of the position.

AIG on average trades 21.6 million shares a day and has an outstanding selection of option strike prices, with open interest up to the five figures near the money. The front-month at-the-money bid/ask spread on calls is  only 1%, making AIG an options traders dream.

Implied volatility stands at 29%, in the lower half of the six-month range. I has been trending pretty much sideways since August, with a couple of gentle undulations.

Options are pricing in confidence that 68.2% of trades will fall between $32.58 and $38.60 over the next month, for a potential gain or loss of 8%.

Trading in options is extremely active today, running 279% above the five-day average. Puts lead slightly at 311% above the average, but calls aren't far behind, running at 261% above average.

AIG next publishes earnings on Nov. 1. The May earnings, which exceeded analyst expecations, triggered a downside gap that turned into a multi-week slide. The August announcement, which also exceeded expectations, produced a measured rise to just short of current levels.

Is it smart to hold this position over the earnings announcement? A tough decision. And speaking of decisions...

Decision for my account: I opened a bull position in AIG on the basis of the Turtle signal. I structured it as January calls with a strike of $33, for 10x leverage. The initial stop/loss is $33.97

I would also have taken the trade based on traditional support and resistance analysis. The breakout was not into blue-sky territory, but the resistance is old and so many have little relevance to the near-term picture.

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