Wednesday, January 30, 2013

On the virtue of being a slacker

No trades today, same as yesterday. Here's why.

From among 9,078 symbols in my database, I analyzed 4,052 having volumes of 500,000 and up priced at $15 and greater.

There were 13 breakouts to the upside, and 19 to the downside for a total of 32 breakouts.

Of those, 12 were tossed out because they failed to achieve odds in my favor. I want more than half of the previous breakouts in the direction of the current breakout to have been profitable. Like any trader, I'm looking for an edge.

An additional 11 were rejected because, although the odds were greater than 50%, the return was too low to make the trade worthwhile.

Four have earnings announcements within 30 days, triggering my exclusion rule.

And four had announced earnings the day before or had seen a very large move upon an announcement within the past few days. My rules disallow a trade under those circumstances.  Basically, I'm looking for anticipation, not reaction.

That left one lone stock, a Brazilian retailer called Companhia Brasileira de Distribuicao (CBD) as the one potential trade worth a deeper look. It broke out to the upside, and has a 53.3% success rate in that direction, with an average return on winning bull trades of 17.5%. That yield adjusted by the success rate works out to 9.3%, well above my 5% minimum.

But, CBD failed the confirmation test. It opened this morning below its $46.21 breakout level and has traded below that level all day so far. My rules say that on the day after a breakout, I have to be able to enter the trade at a price above the breakout level.

So CBD joins the 31 other breakouts as not being a trade for me today.

Without the exclusion rule for earnings announcement scheduled within 30 days, I would have had four additional prospects: INXN, X, NTGR and M, all was which passed the next-day confirmation test.

On days like this, I'm tempted to loosen my rules to produce more prospective trades. I'm a trader, so not trading seems like slacking.

But my trading isn't an end but a means. I trade to make a profit. Each of those rules that knocked symbols out of the running are designed to better the odds of making a profit.

Not trading is a virtue if it keeps me from losing money and so today I wear the slacker label with pride.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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, January 28, 2013

TIBX: Filling the gap

TIBCO Software Inc. (TIBX) broke above its 20-day high of $23.39 on Friday, giving its first bull signal since August. The breakout came on a 1.6% opening gap with a volume spike and then continued to push upward for a 5% intra-day rise.

Today's opening, the first trading day since the breakout,  pushed to a higher high of $24.77 in the first half hour of trading.

Prior to the sudden upswing, TIBX had been on a gentle uptrend that began Dec. 5 from $18.95. That movement was a correction of a decline from $32.95 that began in mid-September. The decline was punctuated on Dec. 5 by a 14% opening gap to the downside after the company gave earnings guidance that traders, clearly, didn't like one bit.

In traditional chart analysis, "filling the gap" means that the price retraces to the mid-point of the gap. Friday's breakout by TIBX did that and much more, crossing the prior gap entirely. Traditionally, once a gap is filled, the price reverses and goes on its merry way. But this breakout didn't fill the gap, it erased it, and I question whether momentum of that sort will reverse quickly.

On the weekly chart TIBX has been in a broad sideways pattern since the summer of 2011.

Friday's breakout was the 17th to the upside since January 2009 and the third of the past 12 months.

Overall, the TIBX bullish breakouts hae proven profitable three times out of five, with an average gain on successful trades of 14%. Adjusting the gain by the 62.5% success rate gives an 8.7% score, well above the 5% that is my informal minimum.

The previous breakouts came in a span of 1,252 days. I divided that period into fifths, each having 250 days (plus change).

The first three quintiles, from March 2009 through March 2011, had high success rates: 67%, 75%, and, in the 3rd quintile covering late 2010 and 2011, 100%.

From that point, the success rate declined. The 4th quintile, from May 2011 to the end of the year, had three breakouts but only one was profitable. The 5th quintile, covering 2012, also had three bull signals and only one success.

The odds for success in trading TIBX have fallen sharply from their finest days.

By their nature, stocks on the daily charts don't produce a lot of data. Breakouts under my trading methods come infrequently. So, looking at the historical odds becomes a trade-off between analyzing a longer period of time, with more data points and greater accuracy, or a shorter time period with fewer data points but greater relevance for what's happening now.

I'm dealing with that problem by looking at both the long and short time spans to get a sense of any trend in the odds over time.

The declining odds of success for bull trades on TIBX contrasts with the bullish over-all odds for the period from 2009 onward. Classical technical traders might call this a divergence, and a bearish divergence at that.

Not that analysts would agree. Their collective wisdom gives TIBX at 25% enthusiasm score, a level that amounts to wild applause, although no one is throwing roses on the stage.

TIBCO's software products provides managers with the analytics they need for decision making. It provides tools for managing the processes of a company -- the implementation of management decisions. In short, it's goals to allow companies to be run based on knowledge rather than guesswork.

Some of the Palo Alto, California company's big-name clients have been Yahoo!, NASDAQ, Major League Baseball and Oracle.

From the standpoint of having a compelling story, TIBCO stands out for me. I'm very data driven in my trading, so TIBO has a business I can relate to.

That business has enabled TIBCO to earn an 18% return on equity, with debt running higher than I like, at 58% of equity.

Looking at the last 12 quarters; TIBO has been consistently profitable. Profits for this company tend to peak in the 3rd calendar quarter (the company's 4th quarter).

Although the 4th of 2011 was higher than its counterpart a year earlier, the 4th of 2012 was unchanged from the prior year. Bottom line: Earnings haven't been accelerating of late.

All 12 quarters saw earnings surprises to the upside.

Institutions own 83% of TIBX shares. The price has been bid up so that it takes $3.89 in shares to control a dollar in sales.

TIBX on average trades 2.6 million shares a day and supports a fine selection of option strike prices with open interesting running to the three- and four-figures. The bid/ask spread for front-month at-the-money calls is 3.3%.

Implied volatility is running at 36%, near the bottom of the six-month range. It has been declining since December with the occasional up-tick to keep things interesting.

Options are pricing in confidence that 68.2% of trades will fall between $21.98 and $27.12 over the next month, for a potential gain or loss of 10%, and between $23.32 and $25.78 over the next week.

Call options are trading at seven times their five-day average volume, and puts are at 70% of average volume.

The fair-price zone on today's 30-minute chart runs from $24.50 to $24.68, encompassing 68.2% of trades surrounding the most-traded price, $24.60. With 3-1/2 hours to go before the close, the price has declined over the last 90 minutes to the bottom of the zone, a bearish sign for the very near term.

TIBCO next publishes earnings on March 25.

Decision for my account: The less I know, the easier the decisions are. I know far too much about TIBX for an easy decision.

On the upside are the long-term odds for success in bullish breakouts, analyst opinion, the financials and the cool nature of the business, and the high trading volume today in call options.

One the downside: The declining rate of success, the high debt, and the near-term decline to the bottom of the fair-price zone.

When in doubt, I always go back to the chart. I note that the gap and today's rise filled in an earlier downside gap, on Dec. 5. That degree of momentum sends me a bullish message, since generally gap fills will falter at the middle of the gap. At the least, it tells me that the breakout is pushing past real resistance on the chart.

That reality on the ground is enough to overcome my misgivings about the declining success rate. After all, each quintile has had its winning trades with quite large profits.

I've opened a bull position in TIBX, structuring it as a bull put spread expiring March14, short the $23 put and long the $21 put. This gives a potential yield of 17% and is profitable down to $22.60, for a 7% cushion.

The cushion means that I'm profitable well into the range from which the price broke out. So if the breakout fails to advance but doesn't move into a longer term downtrend, I'll still make money.

If the price continues to rise, I'll add to the position by buying long calls expiring in May.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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, January 27, 2013

The Week Ahead: 5 Big Ones, plus the Fed

Jobs gone wild! A robust economy! Happy day's, here, again. That's the hope for this momentous week in economic reporting.

There are five major reports, plus a money policy statement, that will make an interesting week filled with earnings announcements even more interesting.

Day by day:

Monday: Durable goods orders at 8:30 a.m. Eastern These are the big ticket items that cost enough to require confidence on the buyer's part that he or she won't need that money later for shelter and beans.

Wednesday: Gross domestic product at 8:30 a.m. This is the advance estimate, the government's first crack at getting it right for the 4th quarter of 2012 and also for the entire year. And at 2:15 p.m., the Federal Open Market Committee issues its announcement at the end of a two-day meeting.

Thursday: Personal income and outlays at 8:30 a.m. Some say the recovery has been so laggard because Americans, still in shock after the temporary collapse of capitalist finance, would rather sink their surplus earnings into savings. We shall truly be on the road to recovery, the theory goes, when people cease their ridiculous prudence about money and once again begin to shop till they drop. This report tracks what we're doing with our money. Subtract outlays from income to get savings.

Friday: Employment situation numbers and the headline-generating unemployment rate at 8:30 a.m. and the Institute of Supply Management manufacturing index at 10 a.m.

Look for the usual pre-jobs-report reports:
  • Wednesday: The ADP employment report generated off of payroll figures at 8:15 a.m.
  • Thursday: The Challenger job-cut report tracking layoffs at 7:30 a.m. and jobless claims and the employment cost index, both at 8:30 a.m.
Leading indicators (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, at 4:30 p.m. Thursday.

Vendor performance, also known as the deliveries times index, from the ISM manufacturing index Friday at 10 a.m.

The S&P 500 index, reported continually during market hours.

The average hourly workweek in manufacturing, from the employment report at 8:30 a.m. Friday.

Average weekly initial jobless claims, at 8:30 a.m. Thursday.

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

Other reports of interest:

Monday: Pending home sales at 10 a.m., and the Dallas Fed's manufacturing survey of Texas (Hook 'em, 'Horns!) at 10:30 a.m.

Tuesday: The S&P Case-Shiller home price index, which tracks home prices in 20 metro areas. All real estate is local, so I find this report to be among the most interesting of the housing spectrum. Also out, the Conference Board consumer confidence index at 10 a.m.

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

Thursday: The Chicago purchasing managers' index by the Institute of Supply Management, at 9:45 a.m.

Friday: Motor vehicle sales throughout the day, the Purchasing Managers manufacturing index a few minutes before 9 a.m., and construction spending at 10 a.m.

Trading calendar

By my rules, as of Monday I'm using March options for the short vertical spreads and May options for single calls and puts and the long vertical spreads. Of course, shares are good at any time.

Good trading!

Friday, January 25, 2013

KSS: A breakout on low volatility

Kohl's Corp. (KSS) broke above its 20-day price channel today after analysts talked happy about the off-price retail niche. Thursday's move above the $45.09 boundary puts KSS at the resistance level set on Dec. 19.

Six out of every 10 breakouts to the upside by KSS over the past four years has resulted in a profitable trade. The average gain has been 5.5% that, combined with the 58.,8% success rate, gives KSS as adjusted yield of 4.4%, a bit below the 5% that is the minimum I prefer to see.

The KSS chart has looked like a smoking ruin since Nov. 29, when a company sales report was followed by a 10.1% downside gap that carried the price from a prior-day close of $51.15 to a post-gap open of $46.

Gaps produce great resistance. They unexpectedly put traders in a losing position, and for many a rise is less a motive to trader and more a reason to close positions to mitigate the loss. I think it will take a lot of work for KSS to move significantly above the $46 level.

The upper price-channel boundary that produced Thursday's bull signal had dipped to a lower level two days earlier and so is poorly correlated with recent resistance levels. A more highly correlated breakout level is $45.21 and the prudent trader would wait for a break above that price before opening a trade.

It's not an awful chart by any means, but I see aspects of it that call for caution.

On the weekly chart KSS has been zig-zagging in a massive slightly declining sideways move since October 2009 and hit the lower boundary of $41.35 on Jan. 3. Thursday's breakout is part of the retracement of that decline.

The prior swing high was $55.25, and I would want to see that exceeded before I even considered the theory that KSS might be in an uptrend. But no matter. The sidewinding channel is wide enough to produce plenty of profit.

Kohl's, headquartered in Menomonee Falls, Wisconsin, is a household name in suburbs across America. It operates 1,127 stores in 49 states that sell clothing, bedding and other soft products, with prices falling in between the high-end department stores and the discounters.

The business is producing a quite respectable return on equity of 17% but at the cost of debt amounting to 73% of equity, which is much higher than I like to see.

Like all U.S. retailers, sales peak in the 4th quarter. The 2011 Christmas season earnings were slightly higher than those of a year earlier. The 2012 4th quarter results have yet to be published.

Institutions own 90% of shares and the stock price is cheap. It takes only 54 cents in shares to control a dollar in sales.

KSS on average trades 2.9 million shares a day and supports a fine selection of option strike prices with open interest mainly in the three- and four-figures in the front month. The front-month at-the-money bid/ask spread on calls is 5.9%, which is fairly narrow.

Implied volatility stands at 22%, the bottom of the six-month range. Implied volatility that low makes it difficult to create option spreads with enough yield to make the effort worthwhile.

A February bull put spread, short the $44 put and long the $40, yields only about 10% and has quite a large risk/reward ratio.

Options are pricing in confidence that 68.2% of trades will fall between $42.11 and $47.93 over the next month for a potential gain or loss of 6.5%, and between $43.62 and $46.42 over the next week.

Options trading is slow, with calls at 77% of the five-day average volume and pouts at a mere 30% of average volume.

The fair-price zone on today's 30-minute chart runs from $44.88 to $45.08, encompassing 68.2% of transactions surrounding the most-traded price, $44.96. With four hours to go before the close, KSS is trading at about the most-traded price and has moved very little for the past two hours.

Kohl's next publishes earnings on Feb. 28. The stock goes ex-dividend sometime in March for a quarterly payout yielding 2.84% annualized at today's prices.

Decision for my account: I'm passing on Kohl's, in part because of the cautions I saw on the chart, and mainly because of the volatility is so low. Volatility is the mother of profit, and when Mom has gone missing from a stock, I tend to stay away, too.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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, January 24, 2013

MAMS: A low-liquidity beakout

Update: I closed my MAMS bull position on March 18 for a 14.1% gain. The entry price was $3.20, and the exit was $3.65.

Regular readers will know that I've added over-the-counter bulletin board stocks to my mix, and a strangely unproductive pool it has been. But today, (drumroll, please), for the first time ever, a tradeable OTC BB stock makes it past my analytical screens. This is too exciting.

MAM Software Group Inc. (MAMS) broke above its 20-day price channel on Wednesday, gapping above the $3.15 upper boundary.

Like most low liquidity stocks, MAMS tends to move in fits and starts, unchanged at a price one day, gapping to a new level with no intraday movement the next day, and then going slightly crazy with a very broad range of trading for a few days in a row.

Longer term, the price has been in an uptrend since late 2011.

For someone schooled the world of the big caps, tiny MAMS, with a market cap of only $44.6 million and four-digit volume, is an education.

MAMS upside breakouts have been profitable nearly three out of every five time since January 2009, for a large average return of each successful trade of 20.2%. Adjusting the return by the 57.1% success rate produces an adjusted yield of 11.6%.

MAMS has no stock options, as is usually the case with the small fry, and so presents no opportunity for leverage.

The breakout came on the second day of a rise from just below the midpoint of the 20-day channel. The stock has been trading in a sideways pattern since late October, with a floor at $2.75 and a ceiling at $3.33.

The price-channel breakout leaves MAMS within the trading range. The prudent trader, which is an epithet that is not always accurate in describing my trading, wouldn't open a bull position until the price had broken past $3.33.

The company, headquartered in Barnsley in the English South Yorkshire region, sells management software and other services to companies working in the automotive aftermarket, with customers in the U.S., Canada, the U.K. and Ireland.

That sector gave the company a return on equity of 30% with no long-term debt. That would be growth stock territory for a more liquid company.

The company has been profitable the five quarters. With analyst following, there's no way to track earnings surprises.

Institutions own 40% of shares, and the prices is slightly above sales parity. It takes $1.68 in shares to control a dollar in sales.

MAMS on average trades only 2,087 shares a day. This produces a relatively wide bid/ask spread on the stock, amounting to 9%.

Today's 30-minute chart shows trading a two levels, $3.18 and $3.20, with volume spikes on the higher price.

MAM Software Group next publishes earnings on Feb. 4, which puts it within the 30-day zone where my rules prohibit opening a new position.

Decision for my account: No trade, because the earnings announcement is coming so soon. That date didn't show up in my usual places, so by the book, I wouldn't have done an analysis of MAMS had I known.

Without the earnings exclusion, I would attempt to open a bull position, but whether I would go through with it would depend upon my ability to get a decent fill on my order.

Actually, a change of heart. I've opened a bull position, by buying shares, but a smaller position than I would under my normal trading rules. I want to get a sense of how the fill comes out. 

In working with my new OTC BB pool, I've noticed that few have success rates as high as that shown by MAMS. So that alone, I think, makes it reasonable to break my earnings announcement rules and take the trade.

The initial bid/ask spread was $2.93/$3.20; I offered $3.07, and had no takers. I increased my bid to $3.10, and stepped away to make a pot of green tea.

Market orders, of course, aren't allowed for OTC BB stocks. 

I'm back, and check the orders. There are no offers below $3.20, so I change my bid to $3.20. I get filled 60 seconds later.

An interesting exercise My first write-up of an OTC BB stock. The lack of options and low volume mean that many of the analytical tools that I use to assess current momentum simply aren't available. So in thinking about the trade, I found myself giving much more weight to the financials than to the chart, something I would never do with a high-volume stock.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

SA: Canadian gold

Update: SA crossed above it's 10-day price channel at $13.96, closing the bear position opened on Jan. 24. The initial position produced an 11.7% profit. 

Two out of the three companies that made the cut in today's analysis are miners.

This morning I rejected a trade in BVN, which came up on my higher volume stocks list, because of an illiquid options grid.

My second mining choice comes from the less liquid pool of exchange-traded stocks.

Seabridge Gold Inc. (SA) broke below its 20-day price channel on Wednesday, piercing the boundary at $16.81, and then continued to drop today, the fourth day of the decline.

SA's bearish breakouts over the last four years have been profitable, with an average gain of 10.2%. the 75% success rate gives an adjusted yield of 7.6% for each trade.

Like most stocks in the precious metals sector, SA has been on a decline since mid-2010, when it peaked at $37.95.

The most recent pattern on the weekly chart appears to be a developing very long term triangle, with a base running from $12.20 to $20.34. Figuring the breakout levels on triangles is more art than science, because of the ambiguities in drawing trendlines, but somewhere between $15 and $16 seems to be a fairly accurate zone for the downside triangle boundary.

Seabridge, based in Toronto, Ontario, concentrates on developing new Canadian gold fields, Once their ready for production, Seabridge either sells its interest or works out a joint venture. No one can forecast the next hot field, so Seabridge is in an inherently high-risk business with huge potential rewards but also significant potential losses.

SA lacks sufficient analyst coverage to calculate an enthusiasm index. The few analysts paying attention are bullish, an opinion not borne out by the financials, which have some dismal points.

Return on equity is a negative 6.7%, although the company has no long-term debt. Ten of the last 11 quarters have shown losses, and the one winner was back in 2011 at an earnings per share level so minuscule that it doesn't even show up by the third decimal point.

Institutions own only 38% of shares, and no price to sales ratio can be calculated since the company has never reported any sales.

And yet, SA has an outstanding selection of option strike prices with open interest running to the three- and four-figures, with front-month at-the-money puts showing a 8% spread. These are options that I could trade, which is fairly amazing, given that SA's average volume is 245,000 shares a day.

Implied volatility stands at 37%, the low point of the six-month range, and has been falling since the start of the year.

Options are pricing in confidence that 68.2% of trades will fall between $14.17 and $17.57 over the next month, for a potential gain or loss of 10.7%, and between $15.06 and $16.68 over the next week.

Put options today are trading 50% above their five-day average volume, and puts are 231% above average volume.

The fair-price zone on today's 30-minute chart runs from $16.01 to $16.29, encompassing 68.9% of transactions surrounding the most-traded price, $16.22. With about three hours left before the close, SA is trading slightly below the zone.

Seabridge last reported earnings on Nov. 14 and I can't find any info on when the next quarterly report will be out. Three months from the last is Feb. 14, and if that's the date, then SA is within my exclusionary rule that bars trades within 30 days of an earnings announcement.

And that's a major problem with trading foreign companies, even those of our Canadian cousins. No country requires as much information about corporations as the U.S. does, and that makes it easy for traders.

Decision for my account: I opened a bear position on SA, despite the ambiguity about the earnings date. The risk of an earnings surprise is to the downside, the direction of the trade.

For further protection, I've structured it as a bear call spread expiring Feb. 16, short the $16 calls and long the $18 calls. This gives a break-even point of $16.42, providing a 3.5% cushion.

If the price continues to fall, I'll add to the position by buying long puts expiring in May with deltas as close to 70 as I can manage.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

BVN: Peruvian mining breakout

Compania de Minas Buenaventura SA (BVN), a Peruvian mining company traded both in Lima and New York under identical symbols, dropped sharply below its 20-day price channel on Wednesday, piercing $34.02, and today continued to tumble for a third day.

The movement came on news: Buenaventura and First Mexican Gold corp. have signed a deal for joint development of a property in Mexico.

Movements on news are always problematic. In the case of BVN, there's the added caution that the break below the price channel doesn't move the price into the new territory. That will come if it falls below the 55-day channel, whose lower boundary is presently at $30.86.

BVN, however, has a history of profitable breakouts to the downside; eight out of 10 have made money, with an average gain on each of 6%.

That return adjusted by the 78.6% success rate givens an adjusted return of 4.8%, below the 5% that is normally my preferred minimum.

The stock has been in a downtrend since peaking at $57.20 in October 2010. This week's decline marks yet another reversal from a higher high in the long staircase down from that peak.

It is a bearish chart, and the handful of analysts following it are universally negative in their opinion as assessed by my enthusiasm index.

Buenaventura, headquartered in Lima, is Peru's largest owner of mining rights, with operations in gold, silver, coal, lead, molybdenum and zinc.

It is a money maker, with return on equity of 21% and no long-term debt. Earnings for the past 11 quarters have without a trend, but all have been profitable enough to produce a trailing price/earnings ratio of 10.92. It has surprised three times to the upside and eight times to the downside.

Institutions own 42% of shares and the stock price is high; it takes $5.85 in shares to control a dollar in sales.

In contrast to the chart, the financials have a bullish tinge.

BVN on average trades a million shares a day and supports a good selection of option strike prices, but with low open interest on the U.S. exchanges.

I would take that to mean that the speculative action, as is often the case with American depository receipts, is happening on the home-country exchange rather than in New York, except that options are trading at levels triple their average five-day volume for calls and nearly quadruple average volume for puts.

The open interest is at double and triple digits, and is spotty enough to make me wonder whether there is sufficient liquidity for an options play. For example, the February call options at the strikes bracketing the at-the-money point have no open interest, something I haven't often seen in a liquid stock.

And in the out month, where I would buy long puts, the delta 70 level also has no open interest. Under my rules, the lack of open interest at key levels is a deal killer.

The front-month at-the-money puts have a 30% bid/ask spread, which is quite wide.

BVN's implied volatility stands at 27%, near the low point of its six-month range. It has been on a shallow decline for most of that period.

Options are pricing in confidence that 68.2% of trades over the next six months will fall between $30.27 and $35.32 for a potential gain or loss of 7.7%, and between $31.58 and $34.01 over the next week.

The fair-price zone on today's 30-minute chart runs from $32.38 to $32.83, encompassing 68.2% of transactions surrounding the most-traded price, $32.82. Five hours before the close BVN is trading at about the most-traded level, having fallen the first hour of trading, risen in the third half hour and gone nowhere so far in the present fourth half hour.

Buenaventura next publishes earnings on March 11. The stock goes ex-dividend in May for a semi-annual payout yielding 1.83% annualized at today's price.

Decision for my account: I don't like the low open interest on options and would need to play Buenaventura as a short stock, which is possible but lacks leverage. 

The average return on successful trades adjusted by the rate of success is lower than I like. The success rate is high, but the return is fairly low, and without leverage it's simply not attractive -- I'm betting that there are more profitable uses for my funds.

For those reasons, I'm passing on BVN. No trade.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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, January 23, 2013

Crises to Come

Ezra Klein over at the Washington Post's "WonkBlog" column has kindly posted a calendar of budget crises presently on the Washington calendar.

You'll find his full write-up here, but below is the brief version:

  • Feb. 4: White House budget due
  • March 1: The sequester, a series of draconian budget cuts, passed by Congress as a motivator (roll eyes here) kicks in.
  • March 27: The government's present spending authority, the concurrent resolution AKA The Kick  the Can Down the Road Act, expires.
  • April 15: Congress' deadline for adopting a budget. (Insert a second eye-roll here.)
  • May 19: The debt ceiling suspension expires. If Congress doesn't act, the suspension will cast doubt on whether the United States has the political will to pay its debts. This is potentially the greatest crisis of them all. So no eye roll here, just a brief frisson of terror.

AAPL: A chart talk

Apple Inc. (AAPL) has been on a downslide since touching an all-time high of $705.07 on Sept. 21 of last year. The low so far in the decline has been $483.38 on Jan. 15.

The media writing on AAPL, predictably, has been "OMG How low can it go Sell Sell Sell" seasoned with the contrarian "I'm smart because I'm loading up cheap".

As always, the problem is how low is low and how cheap is cheap. These are relative terms, and the Apple reporting is treating them as absolutes.

Here's a quick AAPL chart talk:

The stock is trading in a 20-day price channel ranging from $483.38 to $555. It moved out of price channel bear phase (while remaining in a downtrend) on Dec. 31, and gave a fresh bear signal on Jan 14.

As of Wednesday, a move above $531.89 would return AAPL to neutrality, and a break above $555 would be a bull signal.

I would open a bull position on AAPL if it were to break above $555 (confirmed by staying above that level the next day). I would use my usual short-term trading rules.

However, for AAPL to return to an uptrend, it would need to not only set a high above $555, but then drop for a reversal above $483.38, and then continue on by setting a new higher high.

Those three data points would put AAPL into an uptrend on the chart, according to the classic definition, and would allow me under my longer-term rules to open up a bullish diagonal spread or some other cash-generating structure that lasts for several months.

I find the reporting on AAPL to be laughable. The chart is extremely clear. Apple is within 8.1% of becoming a candidate for short-term bullish speculation. That's about three days' move, on average.

But the stock has some work to do before it becomes a candidate for a longer-term position.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

AMTG: Bullish signal from a real-estate play

Apollo Residential Mortgage Inc. (AMTG) broke above its 20-day price channel on Tuesday, sending a bear signal for the first time since early December. If the break above $22.28 continues as an upward move in price that exceeds $22.50, then AMTG will have set a higher high, confirming that it is in the second up-leg of an uptrend that began Nov. 15 from $18.05.

The difference between this week's breakout price and prior highest high illustrates the ambiguity of this breakout. Price channel boundaries may begin at the highest of for the past 20 days, but after that period of time has passed, the channel boundary begins to deteriorate as it follows the post-peak retracement.

I'll say up front, the prudent trader looking at this chart would wait for a break above $22.50 before acting. I'll add, I'm not always a prudent trader.

AMTG's upside bull-side breakouts have been successful two out of three times over the past two years, for an average profit each trade of 17%. Adjusting the profit by the 66.7% success rate gives an adjusted yield of 11.3%, quite an attractive level even if leverage isn't available.

Apollo Residential Mortgage isn't followed by enough analysts to produce a meaningful enthusiasm index.

The 28% return on equity surely is enough to warm any analyst's heart, although that warmth will quickly dissipate in the chill of debt more than five times equity. That level of debt isn't necessarily a built-in characteristic of Apollo's business. Some competitors get along quite well with lower levels.

The New York City company invests in mortgage- backed securities, which these days sound like a dirty word but which are also, still, key tools in the business of financing homes. In other words, Apollo is a real-estate investment trust, a REIT.

The story of REITs is that real estate is beginning to recovery, and that should be more profit in the sector, and therefore greater returns for REIT investors.

Apollo Residential Mortgage is an indirect subsidiary of Apollo Global Management (APO) and is a relatively new entity, with only five quarters of earnings history. Results have been stable the last four quarters, with two upside surprises and two to the downside. The first quarter available, back in 2011, showed a loss, but it has been profits ever since.

Institutions own only 41% of shares, a fairly low level, and yet the price is showing extreme optimism. It takes $7.70 in shares to control a dollar in sales.

AMTG on average trades 334,000 shares a day. For a stock with that volume, it supports a fairly good selection of option strike prices with near-the-money open interest running to three figures. The front-month at-the-money bid/ask spread for calls is 20%, on the high side.

But really, options are beside the point for a REIT. The big draw is dividends, and AMTG pays north of 12%.

Implied volatility stands at 20%, near the middle of the six-month range, and has fallen sharply today after a sharp bump up on Tuesday ended several days of sideways movement.

Options are pricing in confidence that 68.2% of trades will fall between $21.03 and $23.65 over the next month, for a potential gain or loss of 6%, and between $21.71 and $22.97 over the next week.

Trading in option contracts is fairly slow today, with calls at 44% of the five-day average volume and puts at 49% of average volume.

The fair-trade zone on today's 30-minute chart runs from $22.28 to $22.36, encompassing 68.2% of transactions surrounding the most-traded pricde, $22.35. With two hours left before the close, AMTG is trading at about the most-traded level, having had most of its price rise for the day in the first half hour of trading.

Apollo Residential Mortgage next publishes earnings on March 8. The company goes ex-dividend in March for a quarterly payout yielding 12.53% annualized at today's prices.

Decision for my account: I've opened a bull position on AMTG, structuring it as long shares in order to capture the dividend. It's a nice piece of diversification to my options-oriented portfolio, and the options give me a vehicle for hedging without selling if the price declines.

If the price rises, I'll add to the account by buying more shares.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

COF: A bearish break after earnings

Capital One Financial Corp (COF), the credit card and everything else money company, broke below its 20-day price channel on Tuesday, generating a bear signal on the second day after a large earnings-inspired downside gap.

My rules for trading earnings surprises are these: Don't trade on earnings day. Don't trade the day after. Do trade the next day, but only if there's a fresh breakout beyond the price channel. COF meets those rules.

Capital Finance in its Jan. 17 report missed earnings estimates by 11.8, a major error for a company that size in its management of expectations. Expectations crashed in the form of an opening price, $56.59, that stood 8.1% below the prior day's close, $61.59.

The post gap decline on Tuesday carried the price below its lowest level, $56.21, for the past 20 trading days, producing the signal. The price continued lower today, confirming the breakout.

COF has been in a holding pattern since last November -- sideways with some internal trending. Big picture, the stock has been trending upward since October 2011.

A pre-earnings rise began with an upside gap on Dec. 31, carrying the price from that day's low of $56.47 up to a swing high of $62.92 on Jan. 7. The price crash on earnings essentially wiped out the results of that five day trend.

If COF's decline continues, then the next significant resistance is at the 55-day price channel boundary, $54.45. That gives about 3% of easy movement before resistance.

COF has a history of successful trades when it breaks out to the downside. Nearly eight out of 10 (76.5%) have been profitable over the past four years, with an average gain of 7.6%.

The return adjusted for the success rate is 5.8%. That's not particularly high -- my minimum for consideration is 5% -- but COF is a very liquid stock, and that means I can expect good fills on options for some decent leverage.

Analysts going into earnings liked COF a lot, with a collective enthusiasm index of 54%. How well that will hold up in light of the earnings miss is anyone's guess.

The McLean, Virginia company attributed its poorer than expected results to seasonal factors, in the form of "expense and margin trends". I don't entirely get that, since seasonal things can generally be anticipated and mitigated. But then, I am not a fundamentals trader.

Capital One's financials put in the category of slow and steady, with a return on equity of 8% and debt amounting to 61% of equity.

Its earnings have a slight tendency to peak in the 1st quarter -- credit cards? Christmas shopping? -- and that quarter has been higher for at least the past two quarters compared to its year-ago counterpart. However, quarter to quarter, there is no trend. Earnings are all over the place.

Looking at the last 12 quarters, all have been profitable, nine have surprised to the upside and three to the downside.

Institutions own 87% of COF shares, and the price is a bit above sales parity. It takes $1.53 in shares to control a dollar in sales.

COF on average trades 7.7 milloin shares a day, enough to support good selection of option strike prices with four-figure open interest. The front-month at-the-money bid/ask spread on puts is quite narrow, at 3.3%.

Implied volatility stands at 23%, the low point of its six-month range. It has been generally trending lower since Dec. 31.

Options are pricing in confidence that 68.2% of trades will fall between $52.44 and $60 during the next month, for a potential gain or loss of 6.7%, and between $54.40 and $58.04 during the next week.

Option trading is running 20% above its five-day average volume for calls, and 17% below average for puts, giving a slightly bullish mood to current speculation.

The fair-price zone on today's 30-minute chart runs from $56.10 to $56.38, encompassing 68.2% of transactions surrounding the most-traded price, $56.20. With three hours left before the close, the stock is priced near the most-traded level, since most of today's decline occurred during the first 90 minutes of trading.

Capital One next publishes earnings on April 15. The stock goes ex-dividend in March for a quarterly payout yielding 0.36% at today's prices.

Decision for my account: I've opened a bull position on COF, structuring it as a bear call options spread expiring in February, short the $57.50 strike and long the $60 strike. The position is profitable up to $57.97 and has a maximum potential yield of 23%.

If the price continues to fall, I'll add to the position through the purchase of June put options with delta as close to 70 as I can manage.


References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

Tuesday, January 22, 2013

CYBX: Horns of a dilemma

In my overview post today, "How does my garden grow", I identified two stocks out of 21,575 in my analytical universe that met my basic criteria for trading today.

They are Cyberonics Inc. (CYBX), a Houston, Texas company that makes very specialized medical equipment used in treating epilepsy and other diseases of the nervous system, and Franco-Nevada Corp. (FNV), a Toronto, Ontario minerals company focused on gold but also having interests in platinum, oil and gas.

FNV is an outlier, with all downside breakouts coming in profitable, with an average return of 7.5% per trade. CYBX has a success rate of 77%, with an average return of 6.8%.

Looking at the odds alone based on the last four years of trading, both stocks are excellent prospects.

The structure of my analysis will in a somewhat different order from what I usually do, because with these stocks, it is the lower liquidity above all that determines whether a trade can be taken and the nature of any trade.

The stocks both have excellent financials, with a return on equity for CYBX of 24% and for FNV of 13%, with very low debt levels.

The breakouts were to the downside, so good numbers actually argue against the trade.

CYBX is the more liquid of the two, trading on average 255,000 shares a day. FNV trades 89,000 shares daily on the U.S. stock exchange, although its principal trading venue is the Toronto Stock Exchange under the same symbol.

Most important, neither symbol has options that meet my liquidity standards for trading -- the open interest is too low.

So the only way to trade the stocks would be to sell them short. That's not possible with FNV.

I find the situation to be amusing because it shows how trading rules can work against taking a trade. Under my rules, I can't trade FNV because the options are too illiquid and there's no alternative, since short sales aren't possible.

CYBX front-month puts are tradeable -- they have three-figure open interest on two strike prices-- but that drops off to two figures in the out-month that I would use to buy long puts. And in order to construct a bearish vertical spread on the February options, I would have to buy and sell calls, which dip to open interest in the single digits at the money.

So it's a short sale or nothing with CYBX.

Friday's breakout by CYBX carried the price below the 20-day channel boundary, $50.80, ending a sideways movement that had been in place since mid-November but staying within a wider sideways pattern stretching back to September.

A drop below $43.69 would carry CYBX below the 55-day price channel and, if persistent, would decisively break the sidewinder.

With four hours left before the close, the stock is trading now at $47.56, so the potential "easy money" gain on a bear trade is about 8%. Today's decline has come on volume that has been climbing for three days and is running at about four times the average.

As I look at CYBX, I keep wanting to fall back into narrative and fundamental analysis. The breakout was bearish, but CYBX outside the chart just keeps screaming "Bull play!"

Earnings have been on the rise for seven quarters. Ten of the past 11 quarters have surprised to the upside. Analysts give it a 30% enthusiasm rating. Institutions own 92% of shares and have bid up the price so that it takes $5.82 in shares to control a dollar in sales.

The small, still voice that speaks inside of every technical trader is saying, "Does this really make any sense?" The financial data, for some reason, always seems more "real" than the analytical constructs on a chart.

The price decline began on Jan. 17, the day the CEO announced 7,000 shares of stock, and that, apparently, is what triggered the decline. Why is selling? Who knows? It could have nothing at all, or everything, to do with his assessment of the company's prospects.

Today differs from the prior two days of the decline because the price has pulled up from the day's low. "Profit taking", as the media all-purpose explanation goes.

Implied volatility stands at 48%, just above the middle of the six-month range, and has been on the rise since Jan. 11.

Options are pricing confidence that 68.2% of trades will fall between $40.80 and $53.84 over the next month, for a potential gain for loss of 14%, and between $44.19 and $50.45 over the next week.

The fair-price zone on today's 30-minute chart runs from $46.36 to $48.10, encompassing 68.2% of transactions surrounding the most-traded price, $47.57. CYBX is trading near the most-traded price, but it well on its way to establishing a new most-traded at $47.34, a lower level. That's a bearish paw print.

CYBX next publishes earnings on Feb. 18 (which would require me to bend my rules my a few days to enter a trade).

Decision for my account: I'm on the horns of a dilemma, at least if a dilemma horn's are confugured something like a triceratops.  The chart says bear, everything else says bull, and the earnings announcement date says, stay away. I like the 8% potential "easy money" profit; I'm less happy with the fact that I would need to do a short sale to play.

Aside of the loss of leverage without tradeable options, my problem is this: If the price suddenly reverses on a stock with volume in this range, how likely is it that I'll lose liquidity so that I can't easily get out of the position.

I simply don't know. My recent experience with these less liquid issues is insufficient to provide an answer.

So I'm passing on the trade, but I am entering a paper trade, so I can study what happens to this stock. Sometimes, knowledge trumps profit, and that's how I'm playing CYBX today.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

How does my garden grow

My project this weekend was to add the over-the-counter bulletin board stocks to my analytical universe.

My old universe of exchange-traded stocks and funds was 9,062 issues. The new universe, with the OTC BB added in, is 21,575 issues.

There's something about more than doubling the size of a universe that gives me a sense of awesome powers, like being able to cause storms and super novas with the wave of a hand.

Reality struck this morning as only two of the breakouts identified in my analytical scan panned out as potential trades, and as problematical ones at that. So no super novas or storms this trip. The best I can hope for is a gentle morning dew.

Like any gardener, the stuff growing in my garden is more than I want, or can even deal with. Weeds can always overwhelm the useful beauties, so a good stock trader, like a good gardener, must develop some weeding skills.

My database goes back to the first day of trading in 2009. The analytical runs take a lot of time, so I do my daily runs on a subset of the data: Liquid exchange-traded stocks priced above $15 and trading at least 500,000 shares a day, less liquid stocks on the exchanges priced above $5 and trading fewer than 500,000 shares; and OTC BB stocks priced at a penny or more trading at least 100 shares a day.

The major additional restriction is that all the stocks I'm looking at today are tracked by the analysis company Zacks, ensuring that there will be information available about the companies behind the stocks. Neither Zacks nor anyone else looks at a lot of OTC BB stocks, so the Zacks connection is an especially tight restriction on that data.

After that, I identify the prices that have just moved beyond the 20-day price channel, which further restricts the potential trades.

Altogether, I analyzed 2,441 symbols -- a process that took about three hours to run on my Lenovo ThinkPad W520 portable workstation (a lovely machine) -- with these results:
  • Liquid stocks: 17  breakouts beyond the 20-day price channel. Of those, only four had historical odds above 50%, my criterion for considering a trade. Two were removed from consideration because of looming earnings, and dropped back into the price channel this morning and so failed the confirmation test.
  • Less liquid stocks: 11 breakouts. Six had odds above 50%. Of those, three had earnings announcements pending, and one failed confirmation, leaving two, FNV and CYBX, as possible trades. More on those in a later posting today..
  • OTC BB stocks: Five breakouts, none with success rates above 50%.
The main lesson of the excercise is that my rules weed out a lot of potential trades before I spend any time looking at them in detail. I don't sit down and do the weeding myself, mind you, but the computer programs I've written are quite efficient at applying a set of rules to the thousands of trading prospects that are in the data each day.

Although the purpose of stock analysis is weed out the less interesting prospects, the downside is that weeding can rip up beautiful flowers hiding among the weeds, and the gardener will never know what sort of useful beauties are being tossed out with the yard waste.

Trading rules need to be examined, to ensure that they are selecting prospects with the most useful degree of rigor. And that is a process that I shall continue to push in my own trading in the weeks and months to come in 2013.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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, January 20, 2013

The Week Ahead: Homes, and no crisis

This is a four-day trading week with little going on except for a pair of real-estate reports. Since the House Republicans say they plan to approve a three-month extension of the debt ceiling, there's not even a Washington political crisis to motivate traders.

Existing home sales, which encompass most of the housing market, will be released Tuesday, and new home sales, on Friday -- both at 10 a.m. Eastern. 

Housing is considered a major indicator for the blossoming of the post-recession economy like the first crocuses of early spring. So far, the economy has been barely hanging on like a sickly moss. So these two reports are worth a look for signs of a new hope or the dashing of hopes into a new despair.

U.S. markets are closed on Monday for Martin Luther King Jr. Day. Markets in London, Sydney and Tokyo will be open for business.

Leading indicators (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, at 4:30 p.m. Thursday.

The S&P 500 index, reported continually during market hours.

Average weekly initial jobless claims, at 8:30 a.m. Thursday.

Other reports of interest:

Thursday: The preliminary purchasing managers index flash report just before 9 a.m., and petroleum inventories at 11 a.m.

Trading calendar

By my rules, as of Tuesday I'm using February options for the short legs of spreads and May options for single calls and puts and the long legs of spreads. Of course, shares are good at any time.

Good trading!

Friday, January 18, 2013

MINI: A low-liquidity trade with good odds

Since things were so dull with the highly liquid stocks and exchange-traded funds that normally are my trading playground, I tried something different: Analysis and a report on stocks and ETFs tracked by Zacks that have average volume of less than 500,000, with prices of $5 and up.

The analysis of the 1,759 stocks in the universe took nearly 2-1/2 hours to run, but it finished in time for a quick report, analysis and (spoiler) a trade. (I also mistakenly left optionable as a parameter in my search, which limited the number of stocks I analyzed this time around.)

Why go for the small fry at all? They aren't suitable for options trading, generally, and so lack the possibility of leverage.

I'm interested because they help to further diversify my portfolio. Big companies are sort of alike, in a way. The variety is much greater the further down the food chain I go. Moreover, with so few signals from the more liquid issues, I have too much cash sitting idle. This is a way to put it to work, despite the lower returns in this non-leveraged environment.

Altogether, the analysis uncovered 32 breakouts beyond the 20-day price channel. Sixteen were removed from consideration because they'll be reporting earnings in the next 30 days.

Of the 16 remaining, one broke out to the downside and the rest to the upside.

Only three had better than even odds in favor of success.

Of those three winners, I selected the storage company Mobile Mini Inc. (MINI) for deeper analysis.

Mobile Mini, headquartered in Tempe, Arizona, provides portable storage units to companies in sectors such as construction, consumer services and retail, and industry. It has a fleet of 237, 600 units and operates from 133 locations in North America and Europe.

MINI has a success rate of 57% in bullish trades, with an average net yield of 12.2%. That provides a yield adjusted for success of 7%, which is sufficiently high for my needs.

The stock has been trading sideways since Jan. 3, and yesterday's breakout, above the 20-day high of  $22.72, brought it above that range for the first time. It was confirmed today by a further price rise.

Big picture, MINI has been in an uptrend since June 2012. The current rise has put the price at the level of the prior major swing high, $23.08, attained in February 2012.

Only a handful of analysts follow MINI, and they are a wash when it comes to enthusiasm for the stock; the enthusiasm index based on their collective opinions works out to zero.

The company's financials fall in the slow and steady category, with a return on equity of 5% and debt at only 25% of equity. On the books, it's far from being a shooting star.

Earnings have tended to peak in the 4th quarter and has reached higher highs compared to the year ago quarter in both 2011 and 2010. The 2012 4th quarter numbers aren't out yet, but the 3rd quarter earnings exceeded those prior 4th quarter results.

MINI has surprised to the upside in four of the past 11 quarters, and to the downside in six quarters. One quarter was right on analyst expectations.

Institutions own 85% of shares, which is astounding for such a small player, and have bid up the price to where it takes $2.75 in shares to control a dollar in sales.

Forget the analysts. Those two figures suggest that the smart money is bullish on MINI.

MINI on average trades 149,000 shares a day, supporting a moderate selection of option strike prices. Open interest, however, is in the two- and one-figure range. The front-month at-the-money call options has a 28% bid/ask spread. That's huge. 

These are not options I would consider trading. It's shares only with this puppy.

However, I can use the options trading to gauge trader expectations.

Implied volatility stands at 30% and has been trending mainly sideways since last August, with a few bumps. 

Options are pricing in confidence that 68.2% of trades will fall between $21.02 and $25.02 over the next month, for a potential gain or loss of 9%, and between $22.06 and $23.68 over the next week.

Call options are trading very activity, at more than four times their five-day average volume. Puts are languishing at 54% of average volume.

The closing bell has rung, so we're talking history from this point.

The fair-price zone on today's 30-minute chart ran from $22.93 to $23.13, encompassing 68.2% of transactions surrounding the most-traded price, $23.02. The price closed within the zone and just above the most-traded level.

MINI next publishes earnigs on Feb. 22.

Decision for my account: I took the trade based on the odds. Also, the financials weren't awful, and the stock price spread was at 2 cents, which is quite reasonable. I structured the trade as long shares. Very simple.

Going forward, I think I'll be adding these lower liquidity issues permanently to my trading routine. There is some question as to whether I should leave "optionable" as a parameter, even though the options on these small fry are too illiquid for trading under my rules. The parameter ensures that I can perform volatility analysis, which is important, and also, I would think, weeds out some less-than-serious contenders in the marketplace. I shall decide next week.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Clueless

The Federal Open Market Committee has released transcripts of its meetings during 2007, when the economy was sliding into the crisis from which we have not yet recovered.

The Bloomberg News write up is here, with my favorite quote, from Fed Chairman Ben Bernanke in August 2007, "The odds are that the market will stabilize."

Not to turn all retro and Ron Paulish, but aren't these transcripts a strong argument for a hard currency standard, based on gold or platinum or petroleum reserves or some other valuable substance? iPhones, perhaps?

The level of cluelessness among the men and women charged with setting the value of money is just astounding. And if they don't know what they're doing, then they shouldn't be trying to do it at all and should instead adopt a different model, yes?

The full transcript archive can be found here. Fascinating reading, if your favorite genre is horror stories.

Hunger Games: Fail!

Today is a fine example of how having statistics on stock price behavior makes life easy. They let me identify losers quickly, and move on to other things.

Fifteen stocks and exchange-traded funds, out of the 1,025 liquid issues in my current trading universe, broke beyond their 20-day price channels on Thursday, all of them to the upside.

At that point, under my methods, I begin what can probably be described as a Hunger Games competition for stocks. Many are drop from the pack, and only the toughest survive.

The percentage of successful trades for past breakouts ran from a high of 50% down to a low of 19%. So the odds of winning with any of these breakouts is no better than flipping a coin. Talk about random walk!

Of those 15 stocks, 10 are publishing earnings within the next 30 days, meaning that under my rules I exclude them from consideration.

Of the five remaining, three in today's trading fell back within their 20-day price channels, meaning that under my rules, the breakouts were unconfirmed and so are no longer candidates for a trade.

The two survivors of this winnowing process are Dish Network Corp. (DISH) and Omnivision Technologies (OVTI).

OVTI has a win rate of 50% with average return on successful trades of 8.4%, for an adjusted score of 4.2%.

DISH has a win rate of 44%, with an average gain from successful trades of 10.8%, for an adjjusted score of 4.8%.

None of these numbers are attractive to me as a trader. When I gamble, I want the house odds. I don't take trades where the odds are against me, and I expect an adjusted return of at least 5% unleveraged (which can work out to 35% or so with the leverage options typically provide).

So, in today's analytical run -- today's Hunger Game -- everyone fails. There is nothing here to trade, and I shall be starting my weekend early. And it is a long weekend, since the markets will be closed on Monday for Martin Luther King Day. Enjoy!

By the way, I used the term "trading universe" earlier. Here's how I'm doing that.

I use the screener provided to subscribers by the stock analysis company Zacks to select stocks and exchange-traded funds they cover with the following criteria: A price of $15 and a above and average volume of at least 500,000 that can be traded through option contracts.

The number of stocks and ETFs meeting those criteria changes every day, but generally it comes out at 1,000 issues plus change.

Zacks rates stocks on a 1 (bullish) to 5 (bearish) scale. Although I look at the ratings, along with return on equity and debt levels, they aren't essential to my trading decisions. The historical odds and charts are everything under my rules.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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, January 17, 2013

RGR: Trading the firearms frenzy

As President Obama proposed a program to bring a modest degree of regulation to firearms use, Sturm, Ruger & Co. (RGR) moved sharply above its 20-day high of $49.45. Ruger, headquartered in  Southport, Connecticut, is the fourth-largest firearms manufacturer in the United States.

The price move covered 6.4% intra-day on Wednesday, and continued today for a total rise for the two days, at the peak, of 11.2%.

Ruger and the other firearms makers are the ultimate in news stocks since 20 children and six adults were killed a month ago by a mentally ill gunman at an elementary school in Newtown, Connecticut.

Gun shops have been crowded with buyers saying they want to beat what they fear will be a ban on firearms -- unlikely, since the Supreme Court says the government can't do that.

Rugers' corporate website has a blaring headline reading "Protect Your Rights! Gun rights are under attack. We, the silent majority, need to speak up now and make sure our voice is heard."

As always, gun rights and politics are walking hand in hand, and not very silently, at that.

It is easy to dismiss RGR's breakout as a bump up inspired by gun-owner frenzy. The statistics, however, tell a different tale.

RGR has broken out to the upside 10 times since Janaury 2009, two of those last year, in June and November.

Overall, 60% of RGR's upside breakouts have been profitable, with an average yield of 21.7%. These are serious odds in favor of a success that go beyond the headlines of the day. When the yield is adjusted for the success rate, it works ot to 13%, which is extraordinarily high.

As a trader I have a huge dislike of stock movements based on news. I always keep in mind the words said to have been uttered by the financier Nathan Rothschild after he made a huge profit from the Battle of Waterloo: Buy on the sound of cannons; sell on the sound of trumpets.

In the gun debate the trumpets have sounded. The cannon were heard a month ago. It's clear that a few small regulatory things will be done, most likely in the area of more effective background checks for gun buyers, but nothing that is likely to cut into Ruger's profits.

What the chart shows, in my opinion, is a small buying panic that echos the panic at gun-store counters.

RGR, however, could be hurt by the revulsion against unregulated guns that has come in the wake of the Newtown Massacre. Public pension funds in New York, California and Chicago  have said they will either divest or stop buying shares in firearms manufactuers.

If that sentiment became general and reduced demand for shares, it  could have a downside effect on RGR's price.

The current upleg, which began Dec. 18 from $40, fits neatly within a sideways range that has been in force since last July.

The stock has been in an uptrend since late 200i8, punctuated by some sharp corrections that never produced a lower low. The uptrend will be confirmed as being still in force if the price moves above the $60.11 high of Nov. 30.

RGR was one of eight stocks that broke beyond their price channels on Wednesday, five to the upside and three to the downside. I removed four stocks from consideration because of earnings announcements scheduled within the next 30 days.

The remaining four were all confirmed in this morning's trading. Their success rantes range from 37% up to 84%, with average yields running from 3.5% up to 21.7%.

RGR is followed by so few analysts that I can't calculate a meaningful enthusiasm index. The half a handful that follow the company are neutral or negative as to its prospects.

Which is fairly amazing for a company with a 39% return on equity and no debt, one whose earnings have accelerated since the last quarter of 2010, which has been profitable for at least the last 12 quarters, and which has always surprised to the upside.

If I were trading the income statement and balance sheet, I would fall in love with Ruger instantly.

Institutions own 92% of RGR shares and have bid up the price. It takes $2.18 in shares to control a dollar in sales.

RGR on average trades 624,000 shares a day and supports a modest selection of option strike prices with open interest near the money in the three- and four-figures. The front-month at-the-money bid/ask spread on calls is a fairly narrow 3.9%.

Implied volatility stands at 48%, near the middle of the six-month range. It has been gently falling since Jan. 14.

Options are pricing in confidence that 68.2% of trades will fall between $44.46 and $59.18 over the next month, for a potential gain or loss of 14%, and between $48.29 and $55.35 over the next week.

Options are trading well above their five-day average volume, 77% above for calls and 87% above for puts.

The volatility and fevered options trading suggest that RGR is in the midst of a highly speculative situation. The question a trader must ask: Is it speculation based on the news, or on business prospects?

The fair price zone on today's 30-minute chart runs from $51.44 to $52.42, encompassing 68.2% of trades surrounding the most-traded price, $51.81.

With three hours before the close, RGR is trading near the most-traded price, and the stock has moved very little throughout the day. The big gain came with an opening gap. That's when the retail orders generally come into play. There's a reason why the first hour of the trading day is called "amateur hour".

Ruger next publishes earnings on Feb. 25. The stock goes ex-dividend in February for a quarterly payout yielding 2.5% annualized at today's prices.

Decision for my account: Nathan Rothschild had it right. The cannon have fallen silent. I hear the trumpets, so I'm not buying.

There is way too much about today's trading that reminds me of a guy who was scathingly critical of the whole idea of trading charts. I asked him how he trades. Well, he replied, I like on to Yahoo! Finance and see what everyone is saying about the stock, and then, if they're saying good things, I buy it.

No one can really know, but I think the speculation is based on news, not expectations, and the smart trader always remembers that today's headlines are tomorrow's bird-cage liner.

The options have sufficient liquidity to support a trade, and the high volatility would make it a potentially high-yielding one that would provide a 6.8% cushion on a bull put options spread, meaning the trade would be profitable at a mid-February expiration down to $48.30.

But, it would be a news play, and I hate those. Also, the rise has stalled this afternoon, suggesting that upside momentum may be exhausted, temporarily at least.

And what possible news could there be going forward to inspire a further rise? President Obama's gun regulation proposals will now get mired in the Congressional tar pit, from which few proposals emerge intact, if at all. The NRA's grand battle for gun rights will wither for lack of new outrage. I doubt that the president will be making new proposals. 

What was a pair of complementary grand crusades for gun regulation and gun liberty will become the raw material for legislative sausage making.

There's little in that to support a continued explosive rise in RGR shares. 

Two ways to play it going forward; Wait for a break above the high of $60.11, the classic resistance level, or wait for a retreat below the 20-day moving average and then a fresh breakout, when the speculation has cooled a bit and the news is less dramatic.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing the tool.) A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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, January 16, 2013

BIG's small breakout

Update: I closed the position on April 1 when the price fell below the lower boundary of the 10-day price channel, $34.60. The price quickly retreated back within the channel, but under my rules, it will take a new breakout from the 20-day price channel before I open a new BIG position.

The position was closed for a 10.3% gain on the underlying stock. My holdings were structured as long calls expiring in April. The initial options position yielded 47.9%. 

I added to the position several times during its lifetime. Calculating from the average basis and exit, the underlying stock was closed for a 5.7% profit, and the options for a 4.4% loss.

I'll post an essay about adding to positions later, but I'll just say here that I've had a run of positions where the additions turn a winning trader into a loser. Must fix that.

The closeout retailer Big Lots Inc. (BIG) broke above its 20-day high on Tuesday in an 8.7% four-day climb from $27.52 to $29.92.

The move is part of a sideways pattern that has held sway since a 13% earnings miss published on Aug. 23 caused a massive downward gap in the stock price. Big picture: The price has been declining in a stair-step fashion since peaking at $47.22 last spring.

BIG has a slight edge on upside breakouts -- 56.3% have been profitable since January 2009. The average yield of successful trades is high, at 14.9%. Adjusted for the success rate, the average yield works out to 8.4%.

Altogether 18 stocks and one exchange-traded fund among the 1,051 I'm tracking broke beyond their price channels on Tuesday, 15 to the upside and four to the downside.

Eight, including AAPL, which broke to the downside, were removed from consideration because of earnings announcements scheduled in the next 30 days. Four were removed from consideration because they dropped back into their 20-day price channel on Wednesday.

Only two of the remaining had success rates above 50%. The other is Cabela's Inc. (CAB), which also broke out to the upside. It has a success rate identical to BIG's, but a higher average return, 23.7%.

I decided on BIG because CAB's follow-through was too robust. By the time I could even consider a trade, its price had moved 32% above the breakout level. To my mind, that's a set up for a significant pullback as successful traders' take profits.

BIG's breakout was far smaller, but even small breakouts can be profitable over time. As a trader, I actually prefer stocks that quietly slip beyond the price channel, like Navy SEALS on a covert mission, rather than roaring out accompanied by 76 blaring trombones and an Olympic-class fireworks display.

Sometimes, in trading, small is beautiful.

BIG will win no popularity contests among analysts, which is no surprise in light of the August earnings miss. The enthusiasm index runs at negative 38%.

That seems short sighted (Short sighted? The markets?? How dare you, Sir!) in light of Big Lots'  longer-term numbers. Return on equity is 24%. Debt amounts to 73% of equity, higher than I like but not crippling by any means.

The most recent quarter, reported in December, did indeed show a loss, although it surprised to the upside. The 11 quarters before that were all profitable, including the big August earnings miss. Altogether, Big Lots has surprised to the upside in eight of  the past 12 quarters, and to the downside four times.

These are not awful numbers. Certain, the story-minded can construct a narrative about economic recovery encouraging shoppers to move from discounters like Big Lot toward higher end retailers. Given the slow pace of recovery, I wouldn't bet on it.

Institutions own nearly all of BIG's shares -- itself a vote of confidence -- and the price is really, really cheap. It takes just 32 cents in stock to control a dollar in sales.

So for people who look at the financials and analysts, BIG would seem to be a reasonable contrarian play.

However, we are all technical traders here, yes? We play the charts and odds and never fiddle-faddle with the financials.

BIG on average trades 872,000 shares a day, sufficient liquidity to support open front-month open interest in the three figures but not a very wide selection of option strike prices. The front-month at-the-money bid/ask spread is moderate, at 5.9%.

Implied volatility stands at 35%, just below the middle of the six-month range. It has been stair-stepping downward since Dec. 31.

Options are pricing in confidence that 68.2% of trades will fall between $26.69 and $32.77 over the next month, for a potential profit or loss of 10%, and between $28.27 and $31.19 over the next week.

The fair-price zone on today's 30-minute chart extends from $29.85 to $30.26, encompassing 68.2% of transactions surrounding the most-traded price, $30. Two hours before the close, BIG is trading slightly below the zone.

Big Lots next publishes earnings on Feb. 25.

Decision for my account: The options were (barely) liquid enough to trade, so I opened a bull position, structuring it as a bull put option spread expiring Feb. 15, short the $27.50 put and long the $25 put. The spread is profitable down to $27.25, providing a 7.9% cushion. The yield is low, only 9.1%, although I would argue that diversity in yields is a good thing for a trading account.

If the price continues to rise, I shall add to the position by buying call options expiring in April with deltas as close to 70 as I can manage.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing the tool.) A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.