WAL: Regional banking bull play

Update 5/22/2013: WAL on May 22 dropped below its 10-day price channel, signalling that the position should be closed. And close it I did, within half an hour of the signal, because I had structured the position as shares rather than option spreads. My general preference is to act quickly I shares, but to try for a more strategic exit on hedged positions like spreads.

I exited for a 0.5% loss from the initial entry point. I added to the position twice during its lifetime, exiting for a 1.8% loss from the basis for the total position.

Western Alliance Bancorporation (WAL) broke above its 20-day price channel on Tuesday and confirmed the bull signal the next day by trading above the breakout level, $14.39.

The signal came within an uptrend that has carried the price from $4.44 in September 2011 up to Wednesday's high, $14.69. The most recent leg up began Nov. 16, 2012 from $9.28.

This is WAL's 5th bull signal since the present uptrend began in 2011. The four prior trades were all profitable, with an average gain of 16.5% and duration of 71 days.

Since the recovery from the post-recession crash began in early 2009, WAL has produced 12 completed bull signals, with an average yield of 16.5% and duration of 62 days. The unsuccessful trades each lost 12.7% on average and endured for 19 days.

The yield spread in the post-recession stats is fairly unimpressive, frankly at 3.8%. However, among the six symbols that survived my initial analysis (see "Wednesday's Prospects"), WAL has the best success rate both for the current trend and the total recovery.

Western Alliance, headquartered in Phoeix, Arizona, is a bank holding company with three banking subsidiaries: Bank of Nevada operating in southern Nevada (that means Las Vegas), Western Alliance Bank in Arizona and northern Nevada (that means Reno), and Torrey Pines Bank operating in California.

It also runs two non-bank subsidiaries: Shine Investment Advisory Services and Western Alliance Equipment Finance.

Analysts collectively come down on the unenthusiastic side when it comes to WAL. The company is followed by a double handful of analysts, so their opinion deserves some weight.

Western Alliance reports return on equity of 12%, not growth stock territory but respectable. Long-term debt comes in at 46% of equity, a bit higher than I like but banking companies tend to be on the high side.

The company's quarterly earnings have been accelerating since the 2nd quarter of 2011, with only one failure to come in higher that the prior quarter, and that by only a penny per share.

Of the past 12 quarters, nine have been profitable and three showed losses, one of them -- 2011Q4 -- of fairly devastating proportions. The company has surprised to the upside in eight quarters, and to the downside in three.

Institutions own 70% of shares, which is high for a company this size, and the price has been bid up to an high level; it takes $3.77 in shares to control a dollar in sales.

WAL on average trades 505,906 shares a day. That supports a very small selection of option strike prices with open interest, in the two places it exists in the single digits. These options aren't acceptable as a trading vehicle under my rules, so any WAL position in my account will be structured as long shares.

I'm going to skip the volatility analysis, which is based on options. The open interest is just too low for them to be worth anything as an analytical tool.

In the very near term WAL has been trading sideways with a ceiling of  $14.39 and a floor of $13.37. The breakout in subsequent trading pulled back from its high but remained above the breakout level. It's not showing a lot of momentum.

The price was near the lower boundary of the 20-day price channel when earnings were published after the close on  April 18. The announcement prompted a four-day climb of two up days, each followed by a down day.

The fair-trade zone on today's half-hour chart runs from $14.46 to $14.58, encompassing 68.2% of transactions surrounding the most-traded price, $14.55. The price began the day above the zone, collapsed to the bottom of the zone and is now near the most-traded price. There's not much upward momentum today, but not a lot of downward momentum, either.

Western Alliance next publishes earnings on July 20.

Decision for my account: I've opened a bull position in WAL, structured as long shares. The one point in my analysis that gives me pause is the narrow yield spread between winning and losing trades, but much of that was prior to the present uptrend and so should be discounted. Also, the breakout above the present sideways trend is ambiguous, but getting in now will allow me to catch any strong breakout, and the price of being wrong on an unleveraged position will be fairly small.

References

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

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

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.