Friday: No Trade

I won't be opening any new positions today. Here's why.

Three of the 10 survivors from my initial screening, see "Thursday's Prospects" posted last night, failed confirmation today.

One, CWLR, had a huge gap up because of a buyout offer, the sort of news-driven drama that I won't trade because, after all, the cat is out of the bag and subsequent price moves will be driven more by behind-the-scenes negotiations rather than by the consensus of traders.

Of the remaining six, LG and LPNT had options with open interest too low to meet my requirements, CPHD had only even odds of success in its current trend, and LXRX had a negative win/lose yield spread.

I considered CNO because of its excellent odds, 3:1, and an impressive 14.9% win/lose yield spread. Actually, I had started writing up an analysis. But in the end, I decided that the options grid would be difficult to work with because of the distribution of open interest.

The final possible trade, CFN, has the options liquidity that I need, but it rose 5.5% on its breakout day and another 3.6% to hit its high (so far) today. That's a lot of upside movement in a short time that is bound to produce a downside reaction. It's not a rule that I reject trades like that, but I decided to in this  instance. Call it a hunch.

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.

Friday's Prospects

On Thursday, May 30:

Of 2,309 stocks and exchange-traded funds in this week's analytical universe, 54 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 24 to the upside and 30 to the downside.

In addition, eight that are traded over the counter broke out, two to the upside and six to the downside.

Within my analytical universe, 2.7% of symbols gave bull or bear signals, down from 5.4% the prior trading day.

The ratio of bull to bear signals is 1:1.4, compared to 1:11.5 the prior trading day, suggesting a neutral bias to the market's day. My cut-off point for bullish bias is 2:1 or greater, and for bearish bias, 1:2 or smaller.

Ten of the major-exchange symbols survived my initial screening, nine having broken out to the upside and one to the downside. The upside breakouts are CFN, CLWR, CNO, INFA, JNPR, LG, LPL, LPNT and LXRX. The downside breakout is CPHD.

None of the over-the-counter symbols survived my initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Friday, May 31.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for

• the odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
• a yield adjusted by those odds of 5% or greater,
• and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options or sufficient liquidity to allow for short sale.

GPS Closed

I've given up on rolling forward my GPS options spreads, which expired May 17. I didn't roll immediately because earnings were looming, and the stock confirmed an exit signal today.

I've updated my initial entry post, "GPS: Back in the bull column", with details.

CLF: Bear play on iron and coal

Update 7/30/2013: CLF crossed above its 10-day price channel on July 10, giving a signal to close my bear position in the company. I had some hopes of rolling the position over into August, but a bull signal on July 22, confirmed on July 23, made a roll impossible under my rules.

(My write-up is late because it fell between the cracks during my travels in East Asia. There was no trading error.)

The stock declined 6.5% during the 16 days, on average, that I held the position. I entered and exited the position in several steps, from May 30 through June 10, and exited in steps, from June 22 through July 10. The yield on the stock works out to 152.3% annualized.

I structured the position as short vertical spreads sold for credit. The yield on risk was 30.2%, or 710.8% annualized.

Cliffs Natural Resources Inc. (CLF) continues a long-running decline as it sends a bear signal, punctuating the end of a correction to the upside that carried the price from the most recent low, $16.74 on April 22, to a peak of $23.75 on May 13.

Wednesday's break below the 20-day price channel was confirmed today by the stock trading below the channel boundary. However, the low set on breakout day, $18.50, remains intact, suggesting that there isn't much immediate momentum behind the downside move.

CLF began its decline in July 2011 from $102. The price has fallen in three stair-steps that has carried it to levels last seen at the time of the recession crash, when in March 2009 the stock hit bottom at $11.80.

A stock showing that much downside momentum is bound to have a record tilted toward successful bear trades, and CLF does not disappoint.

This is the symbols 10th bear signal since the downtrend began in 2011. Six of the completed signals were profitable, for an average yield of 9.3%. The three failed trades lost 2.6% on average, producing a win/lose yield spread of 6.3%.

CLF was one of two symbols that survived my initial screening (see "Thursday's Prospects" posted last night). The other survivor, HMA, has an odds profile that is nearly as good as CLF's, but the distribution of open interest among HMA option strike prices would make it difficult to construct a hedged vertical credit spread.

Cliffs Natural Resources, headquartered in Cleveland, Ohio, mines iron ore and coal in the United States and Australia, and also does preliminary processing of the iron ore for later transformation by its customers. It's very much an upstream, resource extraction sort of enterprise, with all the market risk associated with undifferentiated commodities. It's business includes a heavy commitment to the China market.

Perhaps it's the uncertainties of iron and coal, perhaps it's worry about China, perhaps concerns about U.S. manufacturing -- analysts hold a poor  opinion of CLF's prospects, giving it a negative 73% enthusiasm index.

Cliffs' financials are no where near as negative. The company reports return on equity of 7% with moderate debt amounting to 56% of equity.

Among the last 12 quarters, earnings peaked in the the 3rd quarter of 2011, and then dropped sharply amid an announcement of a new offering of public shares, something that gives each share a smaller portion of earnings.

Each quarter has shown a profit. The company has surprised four times to the upside, and eight times to the downside during the last 12 quarters.

Institutions own 75% of shares, and the price has been driven down to the point where it takes 58 cents in shares to control a dollar in sales.

CLF on average trades 10.5 million shares a day  and supports a wide selection of option strike prices with open interest in the four figures. The bid/ask spread on front-month, at-the-money put options is quite narrow, at 2.9%.

Implied volatility stands a 60%, about the mid-point of the six-month range, and has been stair-stepping lower since mid-April.

Options are pricing in confidence that 68.2% of trades will fall between $15.49 and $21.93 over the next month, for a potential gain or loss of 17.2%, and between $17.16 and $20.26 over the next week.

Trading in options today is quite heavy, with puts running at more than double their five-day average volume, and calls at 63% above average.

The fair-price zone on today's 30-minute chart runs from $18.73 to $19.06, encompassing 68.2% of trades surrounding the most-traded price, $18.99. The price has traversed the entire range of the zone three times so far today and with three hours to go before the closing bell, stands near the bottom of the zone.

CLF next publishes earnings on July 22. The stock goes ex-dividend in August for a quarterly payout yielding 3.19% annualized at today's prices.

Decision for my account: I've opened a bear position on CLF, structuring it as a vertical credit spread expiring in June, short the $19 calls and long the $21 calls. The position provides a 4.1% cushion of profitability above the entry price as expiration. The maximum potential yield at expiration is 39.9%.

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.

Thursday's Prospects

On Wednesday, May 29:

Of 2,309 stocks and exchange-traded funds in this week's analytical universe, 114 that are traded on the major American stock exchanges broke beyond their 20-day price channels, nine to the upside and 105 to the downside.

In addition, 11 that are traded over the counter broke out, one to the upside and 10 to the downside.

Within my analytical universe, 5.4% of symbols gave bull or bear signals, up from 2% the prior trading day.

The ratio of bull to bear signals is 1:11.5, compared to 1:1.8 the prior trading day, suggesting a bearish bias in the market. My cut-off point for bullish bias is 2:1 or greater, and for bearish bias, 1:2 or smaller.

Two of the major-exchange symbols survived my initial screening, one each having broken out in either direction, HMA to the upside and CLF to the downside.

None of the over-the-counter symbols survived my initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Thursday, May 30.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for

• the odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
• a yield adjusted by those odds of 5% or greater,
• and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options or sufficient liquidity to allow for short sale.

NRG: Electric bear play

Update 6/12/2013: NRG pushed above its stop/loss point, set at double the average daily trading range above the entry level and I've closed the position for a loss. The stock rose by 2% above initial entry during the time I held the position. I added to the position twice, and the stock rose to 3.3% above my basis.

I structured the position as hedged and leveraged short vertical option spreads. They produced a negative 17.6% yield on risk.

NRG Energy Inc. (NRG), in breaking below its 20-day price channel, set a lower low, breaking a daily-chart uptrend that has been in effect since Oct. 15, when the price hit a correction low of $19.28.

The correction was part of a weekly chart uptrend that began from $14.29 in April 2012.

The prior low in the current leg up was $26.70 on May 10. On Tuesday NRG recorded a low of $25.73 and has traded still lower today.

However, one low does not a trend make. To confirm the trend, NRG will need to rise and then reverse at a level below the swing high of $28.67, set on May 22, and then push below whatever the final low will be in the present leg down.

That's  not a barrier to opening a bear position now. It is something to keep in when determining where to get out -- a rise above $28.67 says the downtrend is over so head for the exit.

This is NRG's second bear signal since the present trend -- to the upside -- began in April 2012. The one completed trend was a success, yielding 6.3%.

NRG was one of six symbols to survive my initial screening (see "Wednesday's Prospects", posted last night). All but NRG and FBR retreated back within their price channels, failing to confirm the signal.

FBR sent a bull signal, but its options lack sufficient open interest to meet my criteria for trading, and at this point I'm looking for symbols I can both hedge and leverage using option credit spreads. That leaves NRG as the only symbol on today's list that will meet that need.

NRG Energy is a wholesale energy company with an operational headquarters in Houston, Texas. It also sells electricity to retail markets.

Analysts are quite positive about NRG's prospects, giving the stock a 63% enthusiasm rating. Of course, those opinions will date back to before the present price decline.

Utilities like NRG are assessed not only as energy providers but as dividend plays. Treasury yields rose on Tuesday, and utility stocks generally fell, since dividend yield rises produce a corresponding fall in the market price of principal.

I don't say that a higher yields account for everything that's happening with NRG, but it is most certainly a contributing factor.

NRG Energy is something way less than a growth stock. Return on equity is only 2%, and debt stands 56% above equity. These are good numbers for a bear play such as the one I'm contemplating.

The company since at least 2011 has produced losses in the 4th and following 1st quarters and profits in the rest. Losses for those quarters in the 2012/13 were less than the 2011/12 combo, which in turn were more than the prior year.

Profits in the two profitable quarters were a mirror image: Lower profits in 2010, higher in 2011 and lower in 2012. NRG Energy year by year has tended toward extremes in both directions.

Institutions own 96% of shares and the price is near parity with sales. It takes 98 cents in shares to control a dollar in sales.

NRG on average trades 4.1 million shares a day and supports a wide selection of option strike prices with open interest in four and five figures. The bid/ask spread  on front-month at-the-money calls is 15.4%, quite a wide spread.

Implied volatility stands at 28%, above the mid-point of the six-month range. Volatility has been on a gentle rise since mid-May. Options are pricing in confidence that 68.2% of trades will fall between $23.87 and $28.01 over the next month, for a potential 8% gain or loss, and between $24.94 and $26.94 over the next week.

Options today are trading below their five-day average volume, at 54% of average for puts and 36% for calls.

The fair-price zone on today's 30-minute chart runs from $25.73 to $25.94, encompassing 68.2% of transactions surrounding the most-traded price, $25.90. With 90 minutes left before the closing bell, NRG is trading at the top of the zone after spending most of the day in the cellar.

NRG Energy next publishes earnings on Aug. 5. The stock goes ex-dividend in July for a quarterly payout yielding 1.85% annualized at current prices.

Decision for my account: I've opened a bear position in NRG, structuring it as a vertical credit spread expiring in June, short the $26 call and long the $28 call. The position provides a 2.2% hedge of profitability above the entry price and a maximum potential profit of 33.3%.

The wide bid/ask spread on options gave me some pause, and it was indeed impossible to get a fill at  my initial asking price. The fact that this is an unproven downtrend within an uptrend is also reason for concern. In the end, however, I came down on the side of opening a position.

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.

Wednesday's Prospects

On Tuesday, May 28:

Of 2,309 stocks and exchange-traded funds in this week's analytical universe, 42 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 16 to the upside and 26 to the downside.

In addition, five that are traded over the counter broke out, one to the upside and four to the downside.

Within my analytical universe, 2% of symbols gave bull or bear signals, barely changed from the prior trading day.

The ratio of bull to bear signals is 1:1.8, compared to 1:6.5 the prior trading day, suggesting a neutral bias to the market. My cut-off point for bullish bias is 2:1 or greater, and for bearish bias, 1:2 or smaller.

Five of the major-exchange symbols survived my initial screening, four having broken out to the upside and one to the downside. The four bull signals were on AN, FBR, OMC and VPHM. The one bear signal was on NRG.

One over-the-counter symbol, AAUKY, survived my initial screening, having broken out to the upside.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Wednesday, May 29.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for

• the odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
• a yield adjusted by those odds of 5% or greater,
• and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options or sufficient liquidity to allow for short sale.

Tuesday: No Trade, with musings on perspective

My screening of Friday's market results (see "Tuesday's Prospects") produced no potential trades for today. So I won't be taking a closer look at bull or bear signals with an eye toward opening any new positions.

The indexes traded higher at the open, prompting the usual flurry of happy-talk headlines ("Dow rockets, stock prices jump" -- USA Today).

Just to keep things in perspective.

The S&P 500 began its current leg up on the weekly chart from 1074.77 in mid-November 2012 and peaked at 1687.18 last week. Today's high so far has been 1674.21, and with four hours to go before the closing bell, the price has drawn back to 1667.23.

A close above 1687.18 will suggest the S&P 500 is continuing its uptrend, and a close below 1074.77 will mean that a weekly-chart downtrend is in place. (The present uptrend began in 2009 from 666.79.)

On the daily chart, the present leg up began from 1536.03 on April 18. A decline below that level would suggest further daily-chart correction within an uptrend.

Bottom line: A good day for bulls, but don't break out the champagne yet.

A note on terminology: Analysts use words like long-term, mid-term and short-term, but I have no idea what they mean. So I prefer to use the chart underlying my discussion to indicate the time span that I'm considering:

• Monthly chart for the S&P 500 uptrend that began in 1995 and has been in a sideways correction since 2000
• Weekly chart for the uptrend beginning in 2009 within the larger correction, and also for the most recent major leg up within the uptrend, beginning in October 2011.
• Daily chart  for the leg up that began on April 18 within the large leg up that began in 2011 within the uptrend that began in 2009.

Confusing? You bet. So I'll end this idle musing with my favorite quote from the Dune universe:

"Wait a bit, Tyek," Farad'n said. "There are wheels within wheels here."

--Children of Dune, by Frank Herbert

Analytical Span

I've made a change in my screening procedures.

Prior to the end of last week I screened by calculating historical odds on bull and bear signals stretching back a year from the present. That period is what I call the "analytical span".

Those odds are the first step in my screening. A stock that, during the past year, profited from half or more of its trades in the direction of the most recent bull or bear signal lived to face further tests. Those that were unprofitable for more than half of those trades were stricken from further consideration.

A year is a meaningful span for a company's finances and management, but fairly arbitrary for the markets.

Long-time readers will know that I'm always looking for an opportunity to cut out the arbitrary and replace it with something more closely tied to the charts.

To that end, I've changed the analytical span to match the period from the start of the most recent weekly-chart trend on the S&P 500 up to the present. The S&P 500 has been in an uptrend since Oct. 4, 2011.

In practice, I doubt that the change will make a huge difference. Many stocks, especially those with higher market capitalization, tend to track the S&P 500 to a large extent.

References

My trading rules can be read 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.

Trend Change

There's something happening here

What it is ain't exactly clear

"For What It's Worth", Stephen Stills (1966)

The something that's happening in the markets, in contrast to the vision of Buffalo Springfield's song, is starting to become clear.

We appear to be in a trend change.

The bull and bear signal numbers out of my analytical universe of about 2,300 symbols tell the story:

On May 3 I found 132 signals from symbols traded on the NYSE, AMEX and NASDAQ -- the major American exchanges. That's a signal rate of 5.7%.

By last Friday, May 24, the number of breakouts had dropped to 39, for a signal rate of 1.7%.

Put in the scariest of terms, that's a 70% decline in the number of bull and bear signals in a period of three weeks.

The decline was underway from May 3 onward, with total signals declining from 132 to 37 by May 21, rising to 64 on May 22, and then declining again on May 23 and 24 down to 39.

My screening method picked up a change well before it showed up on the S&P 500 chart. The index closed on May 3 at 1614.42, set higher lows consistently as it rose to close at 1666.29 on May 20, hit an all-time high of 1687.18 two days later on May 22, and only then declined into the next day. On May 24 the index reversed for a rise intra-day that failed to set a higher high or a lower low.

To be exactly clear: The S&P 500 chart doesn't yet show any change in the daily-chart trend. To do that it would need to set a lower low by closing below the base of the current up leg. That' s 1536.03, the low set on April 18, a 9% decline before the all-time high.

In order to verify the downtrend, that lower low would need to be followed by a high below 1687.18 followed by a reversal to yet another lower low.

The weekly chart, which tracks the longer-term trend, shows the present up leg beginning on Oct. 3, 2011 from 1074.77, which would be a 36.3% decline.

But these things happen. Big declines aren't all that rare. Three weeks in late July-early August 2011 saw the S&P 55 decline by 18.1%. 

Mid-October to mid-April 2012 saw a five-week decline of 8.2%. That was the fall that immediately preceded the present leg up.

The recession crash from autumn 2007 to spring 2009 carried the S&P 500 down 57.7%.

These things happen.

As a trader, I'm gratified to see my methods picking up on major market changes early. The decline in the total number of signals tells me that something is happening, and the ratio between the bull and bear signals gives sense of the direction and magnitude of the change. 

I went from a bull/bear ratio of 6.8:1 on May 3 down to 1:5.5 on May 24. It was a steady decline on the bull side and rise on the bear side throughout the three weeks covered.

I think it will pay, going forward, to give attention to those numbers. Potential trades were still making it through my screening process, and so there was a chance that I would still be served bad trades that would cost me if the trend change in fact is happening.

A rule that says I only take trades when the bull/bear ratio is at a certain level in favor of the direction of that trade would make my system more robust: Maybe 3:1 for a bull trade or 1:3 for a bear trade. Those ratios would have halted all trades on May 16, resumed to the bull side on May 17, would have halted all trades again on May 20, and moved me to the bear side on May 22.

We'll see what happens. I'm not going to write this into a rule based on so little data, but I shall begin to include the ratio as part of my analysis and reporting.

One "gotcha" in this discussion is the fact that I'm analyzing a subset of all stocks traded on the major exchanges: Stocks tracked by the rating aggregator Zacks that have market capitalization of $1 billion or greater (mid-cap, or by some definitions, mid-cap and the top of small-cap). I have no limits on price or volume.

This means that the stocks in my universe have a following among some analysts -- even if it's the CEO's first cousin once removed. Because all or most of the small-cap stocks are cut out, the stocks I analyze will tend to be active and to give heavier weight to the most liquid issues -- the household names that dominate market coverage, the sorts of stocks, in fact, that show up in the S&P 500;.

So test the extent of the trend change I think I'm seeing, I applied the analysis to all 9,353 symbols in my major-exchange database. On Friday, May 24, there were 127 signals, 39 to the bull side and 88 to the bear side.

The signals account for 1.4% of the total universe of symbols analyzed, quite close the 1.7% figure obtained by my more limited list.

The narrower list of stocks -- my analytical universe -- was more bearish than the market as a whole: 84.6% of signals were to the bear side on the short list, compared to 69.3% on the whole market.

The bull/bear ratio for the whole market was 1:2.3; for my analytical universe, it was 1:5.5.

Those results are close enough to persuade me that my analytical universe is a fairly good avatar for the whole market. What's happening here, whatever it may be, is a market-wide phenomenon.

References

My trading rules can be read 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's Prospects

On Friday, May 24:

Of 2,309 stocks and exchange-traded funds in this week's analytical universe, 39 that are traded on the major American stock exchanges broke beyond their 20-day price channels, six to the upside and 33 to the downside.

In addition, six that are traded over the counter broke out, all to the downside.

The ratio of bull to bear signals is 1:6.5, suggesting a bearish bias to the market.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for

• the odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
• a yield adjusted by those odds of 5% or greater,
• and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options or sufficient liquidity to allow for short sale.

None of the major-exchange symbols or over-the-counter symbols survived my initial screening, a first since I adopted this method of analysis. The failures were all due to either less-than-even odds of success in the direction of the signal, or insufficiently high adjusted yields.

The four major-exchange symbols that had sufficient odds but failed on the yield adjustment are PG to the upside, and GME, TTA and HTA to the downside.

The Week Ahead: A holiday, then income, outlays, GDP

Markets will be closed on Monday for Memorial Day in New York and the Spring Bank Holiday in London. Tokyo and Sydney will be open for business.

Despite the shortened week in the United States, the economic calendar will have a couple of big bangs and some smaller firecrackers.

Personal income and outlays will be released Friday at 8:30 a.m. Eastern. It's important because the figures show what people are doing with their money: Saving or spending. During good times we're regularly lectured by Very Smart People about the virtues of savings. With an economy not yet fully recovered from the recent recession, the VSP's are advising, Shop 'til you drop.

On Thursday at 8:30 a.m. the government takes a second try at the 1st quarter gross domestic product numbers, in the hopes that they'll be more accurate than the first attempt a month ago. The initial release put growth at 2.5%. Any significant variation from that number will have market impact.

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.

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

Other reports of interest:

Monday: The S&P Case-Shiller home price index, with statistics from 20 metro areas, at 9 a.m., the Conference Board consumer confidence report at 10 a.m. and the Dallas Federal Reserve Bank's manufacturing survey at 10:30 a.m.

Thursday: Pending home sales at 10 a.m. and petroleum inventories at 10:30 a.m.

Friday: The Chicago purchasing managers index at 9:45 a.m.

I also follow the Baltic dry index, released daily, tracking the volume of global maritime shipments of coal, iron ore, grain and other raw materials.

Fedsters

Boston Fed Pres. Eric Rosengren, a member of the Federal Open Market Committee, speaks on Wednesday, and Cleveland Fed Pres. Sandra Pianalto, an FOMC alternate, on Friday.

Analytical universe

This week I'll be analyzing new bull and bear signals among 2,309 stocks and exchange-traded funds that have some analyst interest. They are traded both on the major U.S. exchanges and over-the-counter. My universe is selected from mid-cap stocks and larger, defined as market capitalization of $1 billion and greater.

Trading calendar

By my rules, I'm trading June options for short vertical  and butterfly spreads, iron condors and the short legs of covered calls and diagonals as well as September options for single calls and puts. Of course, shares are good at any time.

Enjoy the holiday, and good trading!

Friday: No Trade

Of the two symbols that survived my first-wave screening, the upside breakout, DPZ, failed confirmation, and the downside breakout, AEE, is correcting within a strong uptrend on the weekly chart. (See "Friday's Prospects".)

DPZ's failure to confirm came when it opened below the upper 20-day price-channel boundary, $59. A move above that level today would count as confirmation, but at this point seems unlikely.

AEE fails because of my preference for trading with the trend. The stock has been in an extended uptrend for years, with the most recent leg having begun from $28.17 in early June 2012.

The bear signal came on the 14th day of a correction of the $36.74 swing high that has established a very near term downtrend (low-lower high-lower low) on the daily chart.

That's not very persuasive for the bear case. A drop below $34.26 would buttress the bearish case on the daily chart, but on the weekly chart, which is my principal vehicle for judging trends, it would take a decline below that early June level to begin to establish a downtrend.

AEE has sufficient liquidity for a short sale of shares, and also a selection of options with four-figure open interest. However, the distribution of open interest makes it impossible to hedge the position via a liquid options credit spread. Given the contradiction between the signal and the trend, I would want to have a hedged position.

References

My trading rules can be read 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.

Friday's Prospects

On Thursday, May 23:

Of 2,328 stocks and exchange-traded funds in this week's analytical universe, 59 that are traded on the major American stock exchanges broke beyond their 20-day price channels, four to the upside and 55 to the downside.

In addition, 12  that are traded over the counter broke out, all to the downside.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for

• the odds of a successful trades in the direction of the breakout over the past year, 
• a yield adjusted by those odds of 5% 
• or greater and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options or sufficient liquidity to allow for short sale.

Two of the major-exchange symbols survived my initial screening, one, DPZ, having broken out to the upside and the other, AEE, to the downside.

None of the over-the-counter symbols survived initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Friday, May 24.

Thursday: No Trade

The single survivor of my first-wave screening for Thursday, EXPR, as it turns out was not a survivor at all. My systems failed to pick up an earnings announcement scheduled for May 30 before the open, and so the stock is excluded from consideration based on my 30-day rule for earnings.

(See "Thursday's Prospects" for details of the screening.)

EXPR has a good chart, reasonable financials, excellent odds, so there's nothing to hate about it. It's just the earnings rule that removes it from consideration.

Thursday's Prospects

Update 5/23/2013: CORRECTS to show that at earnings announcement removes EXPR from consideration. 

On Wednesday, May 22:

Of 2,328 stocks and exchange-traded funds in this week's analytical universe, 64 that are traded on the major American stock exchanges broke beyond their 20-day price channels, six to the upside and 58 to the downside.

In addition, eight that are traded over the counter broke out, two to the upside and six to the downside

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for

• the odds of a successful trades in the direction of the breakout over the past year, 
• a yield adjusted by those odds of 5% 
• or greater and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options or sufficient liquidity to allow for short sale.

One of the major-exchange symbols, EXPR, survived my initial screening, having broken out to the upside.

None of the major-exchange symbols survived my initial screening. The one that made it through the odds and yield analysis, EXPR, was blocked by an earnings announcement.

The market has been in an uptrend for so long that symbols generally have low odds of success following bear signals, and it was on that basis that all of the downside breakouts were screened from consideration.

None of the over-the-counter symbols survived initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Thursday, May 23.

MEAS, WAL Closed

I got signals to close two positions during the last hour of trading and have updated their initial entry postings with details.

• "MEAS: A low-volume bull trade"
• "WAL: Regional banking bull play"

TSN: Call me chicken...

Tyson Foods Inc. (TSN) sent a bull signal as it continues to climb toward a challenge to its all-time high of $26 set in November 1998. It has approached that level one time before, in June 2007, before pulling back.

TSN's high so far today, $25.65, stands only 1.3% below the peak, so there is very little room for the price to rise before it hits major resistance, if a 15-year-old price level can indeed be termed "resistance" in any meaningful way. Anything happening in the markets in 1998 is the equivalent of ancient Egypt. Love the pyramids, but where's the relevance?

Even so, call me chicken, but the existence of that old resistance level makes me a little nervous.

Nearer term, TSN has been tracing a sideways pattern since March. The bull signal on Tuesday and subsequent trading today carried the price above the pattern's ceiling.

This is TSN's 4th bull signal since the present leg up began from $14.07 last August. Two of the completed signals was profitable, with an average yield of 15.8%, compared to a loss of 2.4% on the one unsuccessful trade. The resulting win/lose yield spread, 13.4%, makes a quite satisfying case for the strength of TSN's upside momentum.

One other symbol, NGLS, survived my first-wave screening last night (see "Wednesday's Prospects"). It was confirmed in today's trading and met my second-wave tests. But it's options lack sufficient open interest for me to trade, and I'm looking for the leverage and hedging ability that options bring to the table.

Tyson Foods, headquartered in Springdale, Arkansas, is the world's second largest processor and marketer of meat products, and the largest based in the United States. In the American mind Tyson is practically a synonym for chicken.

Sales benefit from the trend toward low-carb eating as a way to reduce American obesity. Business is harmed by the movement toward locally grown products raised using traditional methods rather than on chemistry-driven factory farms.

Certainly, analysts are coming down on the optimistic side, collectively giving Tyson a 38% enthusiasm rating.

The financials back that opinion. With return on equity of 11% and debt on the low side at 31% of equity, the numbers argue for steady growth rather than a run-away rocket that ends in a flame-out.

Tyson has been profitable in the last 12 quarters, although less so this year than in 2011 and, in the most recent quarter, than in 2012. The company has surprised to the upside eight times, and to the downside, four.

Institutions own 92% of shares -- a very high level -- and the price is extremely cheap. It takes 27 cents in shares to control a dollar in sales.

TSN on average trades 5.5 million shares a day but, oddly for such a highly liquid stock, has only a tepid selection of option strike prices with open interest in three figures. The front-month at-the-money bid/ask spread on calls is 6.7%.

Implied volatility stands at 22%, about three-quarters down the dix-month range. It has been declining since early April.

Options are pricing in confidence that 68.2% of trades will fall between $23.77 and $26.95 over the next month, for a potential gain or loss of 6.3%, and between $24.59 and $26.13 over the next week.

With 2-1/2 hours to go before the closing bell, puts are running 55% above their five-day average volume, and calls are lagging at 26% of average volume.

The fair-price zone on today's 30-minute chart runs from $25.33 to $25.51, encompassing 68.2% of transactions surrounding the most-traded price, $25.43. The price has traded within the zone nearly all day, with only a few forays beyond its boundaries.

TSN next publishes earnings on Aug. 5. The stock goes ex-dividend in August for a quarterly payout yielding 0.79% annualized at current prices.

Decision for my account: I'm passing on TSN today. I know it's a bit irrational to take 15-year-old price peaks seriously, but it was unsuccessfully challenged six years ago as well. I've put a marker down on that peak and will treat a break above that level as a bull signal, using my normal rules. But I won't open a position in TSN today.

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.

Wednesday's Prospects

On Tuesday, May 21:

Of 2,328 stocks and exchange-traded funds in this week's analytical universe, 37 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 22 to the upside and 15 to the downside.

In addition, seven that are traded over the counter broke out, five to the upside and two to the downside

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds.

Two of the major-exchange symbols survived my initial screening, both having broken out to the upside: NGLS and TSN.

None of the over-the-counter symbols survived initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Wednesday, May 22.

WY: Smokey the Bull

Update 6/16/2013: I've done a post-mortem on this position, "Anatomy of a failed trade".

Update 6/14/2013: In my entry analysis, below, I mentioned Smokey the Bear. I would have done better to have heeded the warning of The Teddy Bears' Picnic: "If you down to the woods today, you're sure of a big surprise."

I've exited WY with five trading days left before expiration. The price peaked on May 22 at $33.34, then dropped, falling below the 10-day price channel at $31.38. My exit point was around $28.34.

The price of the stock fell by 12.9% during the time I held the position. I added to the position once during that period, and the loss calculated from my basis is 13.7%.

I structured the position as net short vertical option spreads, providing both leverage and a hedge. The hedge was insufficient, given the magnitude of the move, and the leverage magnified my loss, which for the options was 64.1%.

Surprise!

Weyerhaeuser Co. (WY), in sending a bull signal, continues its leg up from $18.70 in June 2012 and today hit a swing high of $32.67, just pennies below its 20-year high of $32.75 set in February 2007.

It's a position of opportunity and caution, opportunity because breaking above major resistance typically means a strong continuation of an uptrend, caution because major resistance has an inconvenient tendency to stop uptrends in their tracks.

WY hit a post recession of $7.02 in March 2009 and remains in an uptrend that continues that recovery. However, it is in a downtrend that began from around $86 in February 2007, before the recession knocked over many houses of cards.

I'm a mid- to short-term trader, so I consider WY to be in an uptrend, but contrary views are just as valid.

Nearer term the stock has been trading in a sideways channel since January and with recent moves has broken above the channel ceiling of around $31.75 to $32.

This is WY's fourth bull signal since the present uptrend began. Two the of three completed signals were successful, for an average profit of 16.2%, compared to a 5.2% loss on the unsuccessful trade. The resulting 11% win/lose yield spread is acceptable, although not spectacular.

WY is among four symbols that survived my second-wave analysis from among the 10 symbols identified from my initial screening. (See "Tuesday's Prospects" for details.)

Six symbols, including the big name of the batch, FB, moved back within their 20-day price channels and so failed confirmation. The others are ACAD, HERO, MPC, QUAD and TV. The three other confirmed symbols --  COG, IMAX and TUP -- had odds that are worse than I like, leaving WY as the sole survivor.

Weyerhaeuser, headerquartered in the Seattle suburb of Federal Way, Washington, is a lumber company operating in 11 countries and managing 20.3 million acres of forest.

When I think forests, I think of Smokey, the U.S. Forest Service's iconic symbol in its campaigns against forest fires. With this chart, though, it's more Smokey the Bull than Smokey the Bear.

It wasn't always so.

The lumber industry was hit hard by the collapse of the housing market in the United States and many other countries, so it is perhaps understandable to see analysts harboring a high degree of bad vibes toward WY, giving it a negative 60% enthusiasm index.

The company reports return on equity of 11% and a higher-than-I-like level of debt, amounting to 92% of equity. These are not high growth numbers by any means.

Weyerhaeuser has been profitable in the past 12 quarters and since the 1st quarter of 2012 has seen a steady uptrend in profits. The company has surprised nine times to the upside in that period, and three times to the downside.

Institutions own 77% of shares, and the price -- contrary to the bad vibes of the analysts -- has been bid up quite a bit. It takes $2.36 in shares to control a dollar in sales.

WY on average trades 4.3 million sahres a day and supports a moderate selection of option strike prices with open interest running to three and four figures. The front-month at-the-money bid/ask spread on calls is 4.6%.

Implied volatility stands at 24%, just below the six-month mid-point. It has been trending sideways since late April.

Options are pricing in confidence that 68.2% of trades will fall between $30.23 and $34.77 over the next month, for a potential gain or loss of 7%, and between $31.41 and $33.59 over the next week. This is a fairly narrow range and could limit opportunities for constructing profitable option sreads.

Put options are trading 3% above their five-month average volume, while calls are at only 30% of average. Sometimes on a breakout option volume rises to a speculative pitch. Not WY.

The fair-price zone on today's 30-minute chart runs from $32.31 to $32.53, encompassing 68.2% of transactions surrounding the most-traded price, $32.49. After moving above the zone early on, WY dropped below the zone in the third half hour and, with two hours plus change left before the closing bell, has moved to the top of the zone.

Weyerhaeuser next publishes earnings on July 25. The stock goes ex-dividend in august for a quarterly payout yielding 2.46% annualized at today's prices.

Decision for my account: I've opened a bull position in WY, structuring it as a vertical credit spread expiring in June, short the $32 put and long the $30 put. The somewhat low volatility made it a bit tricky to put together a spread that with sufficient potential profit to overcome the risk. This spread has maximum potential yield at expiratoin of 16.7% and provides a 2.8% cushion of profit below the entry price.

Bottom line: A ho-hum trade, probably, but nothing to hate.

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.

Tuesday's Prospects

On Monday, May 20:

Of 2,328 stocks and exchange-traded funds in this week's analytical universe, 38 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 26 to the upside and 12 to the downside.

In addition, seven that are traded over the counter broke out, three to the upside and four to the downside

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds.

Ten of the major-exchange symbols survived my initial screening, nine having broken out to the upside and one to the downside. The symbols giving bull signals are are ACAD, OG, HERO, IMAX, MPC, QUAD, TUP, TV and WY. The symbol giving a bear signal is FB.

None of the over-the-counter symbols survived initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Tuesday, May 21.

PSX: Bull signal on downstream petrochemicals

Update 6/7/2013: PSX gave an exit signal on June 5 and I closed the position on June 7. The share price at the exit was down 0.7% from the initial entry price. My overall basis produced a 1.4% loss on the share price. The vertical credit spreads I used as a vehicle for this position produced a loss on risk of 2.2%.

Phillips 66 (PSX) continued the uptrend that began from $28.75 a week after it went public in April 2012 as a spin-off from ConocoPhillips (COP), triggering a bull signal as it pushed above its 20-day price channel boundary at $65.48.

Spin-off charts are hard to analyze. They have a history, but only in part, on the parent company's chart. It's hard to know how much credence to give a combined analysis.

But let's try.

PSX hit an all-time high of $70.52 on March 28, and then corrected down to $56.13 on April 18 before resuming its upward movement. The price remains 7.1% below the all-time high, and it will take a push above that level to fully confirm that the uptrend is in force.

The parent company, COP, hit a swing high of $64.78 in the spring of 2011, then declined down to a low of $41.63 in the fall of 2011.

At the time that PSX was spun off COP was trading at $54.93, and PSX opened at $33.74. Applying simple PSX percentages to the COP price gives a COP equivalent to the PSX peak of $115.

Another way to look at it, using the company's figures for calculating a basis, is to consider COP to account for 77.09% of the fair-market value and PSX for 22.91%. That would put the PSX all-time high at a pre-spinoff equivalent of $301.81.

So I can say with a degree of confidence that PSX has in fact exceeded the equivalent of the combined company's all-time high, $78.94, attained by COP in June 2008 and is therefore definitely in a true uptrend.

This is PSX's 5th bull signal since the it began trading. The four completed signals split evenly at two profitable and two not. However, the winners yielded 25.2% on average, compared to a 6.7% average loss for the losers. The resulting 18.% win/loss yield spread is the largest among my prospects today,
erasing the presumed disadvantage of even odds.

Four other symbols from my first wave screening, listed in the weekend's "Monday's Prospects", were confirmed in today's trading, allowing for further analysis. NBR's prior bull signals within the current trend tilted the odds slightly toward the loss side with a negative win/lose yield spread. ABBV, another spin off, and non-spinoffs FLR and TEX had trends that appeared less robust than PSX's.

Phillips 66 was created as a holding company for the parent company's downstream assets, what the petroleum industry calls  refining, distributing and selling petrochemical products. In other words, its a large part of what happens to the stuff once it leaves the ground.

As with everything in the oil industry, it's complicated. But my short take on the PSX story would be that the economy is recovering, and that means more vehicle miles that need to be fueled as people return to work and therefore their commutes, as they bundle the family into the car for more distant vacations, and as trucks carry more stuff to stores to meet consumer demand.

Analysts, for whatever reason, are positive about PSX's prospects, coming down at 17% on the enthusiasm index.

And no wonder! Phillips 66 reports return on equity of 29%, with debt amounting to only 33% of equity. These are great numbers.

The company has earned a profit in each of the five quarters since the spin-off. The only year-ago comparable possible is this year's third quarter, which exceeded earnings of last year's 1st. Earnings have surprised to the upside in all five quarters.

Institutions own 68% of shares, and the price is bargain-basement. It takes only 23 cents in shares to control a dollar in sales. Stock prices are usually low for a reason. I don't know why in the case of PSX and won't speculate.

PSX on average trades 4.7 million shares per day and has a moderately wide selection of option strike prices with open interest running to four figures. The front-month, at-the-money bid/as spread is 3.5%, on the lowish side.

Implied volatility stands at 33%, near the mid-point of the six-month range. It has been falling fairly steadily since mid-April.

Options are pricing in confidence that 68.2% of trades will fall between $59.64 and $72.20 over the next month, for a potential gain or loss of 9.5%, and between $62.90 and $68.94 over the next week.

Puts are trading at their five-day average volume, and calls are cold, at 44% of volume.

Today's fair-price zone on the 30-minute chart runs from $65.58 to $66.47, encompassing 68.2% of transactions surrounding the most-traded price, $66.31. PSX opened below the zone and stair-stepped higher in the first three hours of trading to a point above the zone, but has fallen to the most-traded price level in the last hour, with 2-1/2 hours to go before the closing bell.

Phillips 66 next publishes earnings on July 31. The stock goes ex-dividend in August for a quarterly payout yielding 1.89% annualized at current prices.

Decision for my account: There's much to like about PSX: Good chart, excellent financials, fairly happy analysts. The low price of the stock relative to sales is a bit worrisome, as is the short history. However, the large win/lose yield spread and the look of the trend overcame those concerns in my mind.

I've opened a bull position in PSX, structuring it as a vertical credit spread expiring in June, short the $65 put and long the $62.5 put. The position provides a 2.7% cushion between the entry price and the break-even point, and a potential maximum yield of 25.4%.

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.

MW Closed

MW was a bear position that growled and headed in the wrong direction, at least from my point of view. However, thanks to the magic of option credit spreads, I eked out a small profit. I've updated my entry posting from April 19 with details.

Monday's Prospects

On Friday, May 17:

Of 2,328 stocks and exchange-traded funds in this week's analytical universe, 60 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 52 to the upside and eight to the downside.

In addition, five that are traded over the counter broke out, two to the upside and three to the downside

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds.

Thirteen of the major-exchange symbols survived my initial screening, 11 having broken out to the upside and two to the downside. The symbols giving bull signals are are ABBV, ARB, FLR, GLP, IX, NBR, PBYI, PSX, QCOM, SRPT and TEX.  The symbols giving bear signals are CPAC and RHP.

None of the over-the-counter symbols survived initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Monday, May 20.

The Week Ahead: Durable goods and housing

Durable goods orders, out at 8:30 a.m. Eastern on Friday, are the top report in a fairly sparse week of economics.

Durable goods are the big-ticket capital items that cost a bundle and are typically used for several years. Think TV set. Or a back-hoe. They are a confidence measure of sorts because a decision to buy expensive things means that the buyer has some faith that the money won't be needed for more immediate needs, like food and shelter and a Netflix subscription.

Three other major reports will be released. Two are out on Wednesday: Existing home sales at 10 a.m. and the Federal Open Market Committee minutes of its April 30-May 1 meeting at 2 p.m. The third, new home sales, will be released at 10 a.m. Thursday.

Existing homes -- pre-owned? -- are the greater part of the housing market. New home sales track a narrower slice of this important sector but leads existing home stats by a couple of months. So one trade off between the two as an indicator is greater timeliness (new) vs. a larger statistical sample (existing).

Also, any home is the embodied result of a wide stream of spending and activity. Like a baby, it has a huge impact in relation to its size. A new home is an addition to the housing stock, meaning it embodies new spending whose ripples are spreading now. An existing home is the embodiment mainly of old spending whose ripples were spreading back in the day but which have largely subsided by now.

The FOMC minutes give the most detailed thinking available into the thinking and possible disagreements among the men and women who set monetary policy.

Also big on the monetary policy side of things, Federal Reserve Chairman Ben Bernanke testifies at 10 a.m. on Wednesday before Congress' Joint Economic Committee.

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:

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

Thursday: Purchasing Managers manufacturing index flash release, just before 9 a.m.

I also follow the Baltic dry index, released daily, tracking the volume of global maritime shipments of coal, iron ore, grain and other raw materials.

Analytical universe

This week I'll be analyzing new bull and bear signals among 2,328 stocks and exchange-traded funds that have some analyst interest. They are traded both on the major U.S. exchanges and over-the-counter. My universe is selected from mid-cap stocks and larger, defined as market capitalization of $1 billion and greater.

Trading calendar

By my rules, I'm trading June options for short vertical  and butterfly spreads, iron condors and the short legs of covered calls and diagonals as well as August options for single calls and puts. Of course, shares are good at any time.

Good trading!

DHR: Tech tools bull signal

Update 6/7/2013: DHR gave an exit signal on June 5 and I closed the position on June 7. During the time I held the position,k the share price declined by 2.6%. I built the position of the vertical credit option spreads, which produced an 18.3% loss on risk.

Danaher Corp. (DHR) broke above its 20-day price channel, producing its 7th bull signal since the present uptrend began from $39.34 in October 2011. The bull signal was confirmed as the price continued to trade above the breakout level today, hitting an all-time high of $63.34.

 Four of the six prior breakouts during the present uptrend were profitable, for an average yield of 4.8%, compared to a 2.5% average loss for the two unsuccessful trades. The spread between the two is fairly narrow, at 2.3%.

DHR was my pick out of eight major exchange symbols that surivived my first-wave screening. (See "Friday's Prospects" posted last night.)

One, MTL, failed confirmation. Five had insufficient open interest on their options to meet my criteria. They are CDNS, FTE, TMHY, FBP and CEB. And one, RJF, had odds that I didn't like.

Danaher, headquartered in Washington, D.C., makes advanced instruments and provides services for a wide range of uses in industry, science and technology. It's a behind-the-scenes sort of company without which the household names would find it hard to keep operating.

Analysts are wildly enthusiastic about DHR, giving it an enthusiasm index of 58%. For all of that the company's finances are on the staid side, with return on equity of 12% and long-term debt amounting to 22% of equity.

It has reported profits in the last 12 quarters within my analytical horizon, with a slight tendency for higher profits but no impressive trend. It has surprised to the upside 10 times, and to the downside twice.

Institutions own 78% of shares, and the price has been bid up; it takes $2.35 in shares to contorl a dollar in sales.

DHR on average trades 2.7 million shares a day, sufficient to control a moderate selectoin of strike prices with open interest running to three and four figures. The front-month at-the-money bid/ask spread on calls is 6.5%.

Implied volatility stands at 15%, one of the lowest levels of the post-recession period. It has been stair-stepping downward since mid-April.

Options are pricing in confidence that 68.2% of trades will fall between $60.63 and $66.01 over the next month, for a potential gain or loss of 4.3%, and between $62.03 and $64.61 over the next week.

Trading in call options is extraordinarily heavy today, at 6-1/2 times the five-day average volume. Puts are running at about 40% above average volume.

The fair-price zone on today's 30-minute chart runs from $63.03 to $63.30, encompassing 68.2% of transactions surrounding the most-traded price, $63.19. The price jumped into the zone in the first half hour of trading and, with three hours to go before the closing bell,  has remained their since, with a couple of brief failed forays above the upper boundary.

DHR next publishes earnings on July 15. The stock goes ex-dividend on June 26 for a quarterly payout yielding 0.16% annualized at today's prices.

Decision for my account: I've opened a bull position in DHR, structuring it as a vertical credit options spread expiring in June, short the  $62.50 puts and long the $60 puts. 

Good chart, OK financials -- there's little to dislike about DHR. It has the disadvantage of adding more tech to my already tech-heavy mix.

The low volatility made it hard to put together an position with sufficient profit, but I made minimal success at it. 

The position at expiration will have a maximum potential yield of 16.7%, and it provides a 2% cushion of profit at expiration between the entry level and the break-even point. Not optimal, but I can live with it.

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.

BTZ Closed

I've closed my position in BTZ and have updated my entry posting with details. BTZ was primarily an income play and a spot to stash some cash during earnings season, when it was hard to find trades. And the profits came entirely from dividends.

Friday's Prospects

On Thursday, May 16:

Of 2,305 stocks and exchange-traded funds in this week's analytical universe, 45 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 24 to the upside and 21 to the downside.

In addition, nine that are traded over the counter broke out, three to the upside and six to the downside

The symbols I'm analyzing are mid- and large-cap stocks that are covered by analysts, as well as selected exchange-traded funds.

Eight of the major-exchange symbols survived my initial screening, six having broken out to the upside and two to the downside. The symbols giving bull signals are are CDNS, CEB, DHR, FBP, RJF and TMH. The symbols giving bear signals are FTE and MTL.

One of the over-the-counter symbols survived initial screening, LDBKY, which broke out to the upside.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Friday, May 17.

Thursday: No Trade

Eight symbols, all bull signals, survived my first wave of screening last night (see "Thursday's Prospects").

Three of the eight, CSE, LPX and MGLN, failed confirmation.

I'm looking for symbols whose options are liquid enough for trading. That means three-figure open interest for the strike prices I care about and fairly narrow bid/ask spreads. AVY, GXP and OMX have options, but they are insufficiently liquid for my purposes.

ODP is trading for only $4 plus change, and options pricing becomes unworkable at such low prices for the underlying. So I struck ODP from my list.

That left CX as the last symbol standing. It has a good chart. The odds of a profitable bull signal are even since the present uptrend began in June 2012, and the win/lose yield spread is only 6.5%, which isn't huge. 

But it was the financials that killed any potential trade in CX. The company has reported losses in all of the last 12 quarters. Return on equity is a negative 10% and long-term debt is 112% of equity. That's too awful for even my taste, and I generally give the financials quite a bit of leeway, focusing mainly on the chart.

CX falls short on my third-wave screening criteria.

So, no trade on Thursday.

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.

Thursday's Prospects

On Wednesday, May 15:

Of 2,305 stocks and exchange-traded funds in this week's analytical universe, 47 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 39 to the upside and eight to the downside.

In addition, six that are traded over the counter broke out, four to the upside and two to the downside

The symbols I'm analyzing are mid- and large-cap stocks that are covered by analysts, as well as selected exchange-traded funds.

Eight of the major-exchange symbols survived my initial screening, all having broken out to the upside. They are AVY, CSE, CX, GXP, LPX, MGLN, ODP and OMX.

None of the over-the-counter symbols survived initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Thursday, May 16.

BIIB: A biotech bull

Update 6/7/2013: BIIB gave an exit signal on June 4 and I closed the position on June 7. The stock was down 0.9% from the price of initial entry. The vertical credit spreads yielded a profit on risk of 4.1%.

Biogen Idec Inc.  (BIIB) did nothing unusual in producing a bull signal. It has been in an uptrend since July 2010, from $46.15, and in the current leg up since Nov. 9, 2012, from $134. The break beyond the 20-price channel on Tuesday carried BIIB once again into blue-sky territory, with an all-time high of $231.99.

This is BIIB's fourth bull signal since the present leg up began. The three prior bull signals were all profitable, producing an average yield of 8.6%.

BIIB has given 21 completed bull signals since the start of 2009, when the broad markets began recovering from the post-recession crash. Fourteen were profitable, for an average yield of 8.1%.

I chose BIIB from a wide selection (see "Wednesday's Prospects" posted last night). The list included some large-cap heavy hitters, but many were flawed. GS and CCE had only even odds of a profitable bull signal in their current trends, MTG was priced too low for options trading, and KBR had a chart a I didn't like. ALL (the symbol, not an emphatic everything) had extremely low implied volatility, which would have limited my potential profits.

BIIB, however, hit the sweet spot. Biogen Idec is a biotech company that focuses on drugs to treat neurological and autoimmune disorders and cancer.

I'll insert my usual pharmaceuticals warning here. Biotechs rely on two factors for success: The sometimes hit-and-miss path toward finding a useful drug, and the bureaucratic workings of the Food and Drug Administration. They are something other than free-market entrepreneurship, and that means the stock price can move dramatically with no prior warning.

Analysts are mildly positive about Bogen Idec's prospects, however. They come down collectively at a 10% enthusiasm rating, not particularly high but at least it's above zero.

The company reports sterling return on equity, at 25%, with low long-term debt, at 10% of equity. These figures combined are growth-stock territory by my definition.

It has been profitable in each of the last 12 quarters, with the most recent, the 1st quarter of 2013, setting a record high for the 12-quarter period. Earnings have surprised to the upside nine times,and to the downside, three.

Institutions own 93% of shares, and the price has been bid up considerably, as is to be expected in the midst of a long uptrend. It takes $9.67 in shares to control a dollar in sales.

BIIB on average trades 1.2 million shares a day and has an extremely wide selection strike prices for a stock at that level of liqudity. Open interest runs generally to the three figures, and the front-month at-the-money bid/ask spread on calls is low, at 3.8%.

Implied volatility is 36%, in the upper half of the six-month range.

Options are pricing in confidence that 68.2% of trades will fall between $204.39 and $251.58 over the next month, for a potential gain or loss of 10.4%, and between $216.65 and $239.32 over the next week.

Trading in options is lagging today, with calls running at 67% of their five-day average volume, and puts at 62%.

The fair-price zone on today's 30-minute chart runs from $226.55 to $229.98, encompassing 68.2% of transactions surrounding the most-traded price, $227.74. BIIB fell below the zone in the first hour of trading then retraced to the top of the zone. With two hours to go before the closing bell, BIIB is trading at about the most-traded level.

Biogen Idec next publishes earnings on July 22.

Decision for my account: I've opened a bull position on BIIB, structuring it as a vertical credit spread expiring in June, long the $220 put and short the $215 put. The position provides a 4% cushion of profit at expiration below the entry price. The potential yield at expiration is 23.6%.

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.

Wednesday's Prospects

On Tuesday, May 14:

Of 2,305 stocks and exchange-traded funds in this week's analytical universe, 88 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 83 to the upside and five to the downside.

In addition, three that are traded over the counter broke out, two to the upside and one to the downside

The symbols I'm analyzing are mid- and large-cap stocks that are covered by analysts, as well as selected exchange-traded funds.

Twenty-three of the major-exchange symbols survived my initial screening, all having broken out to the upside. They are ACM, ALL, BGG, BIIB, CCE, CFX, CHMT, DOV, EGN, GS, KBR, LEG, MPW, MTG, MTW, NPO, PGR, ROK, SCS, SUSQ, SWK, TKC and UHS.

Two of the over-the-counter symbols survived initial screening, both having broken out to the upside. They are BAESY and CRNCY.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Wednesday, May 15.

PCYC: Bull signal in a long uptrend

Update 6/21/2013: I've closed PCYC for a loss after a three-day decline amid a reversal of the general markets to the downside that erased my potential profits. The share price at exit stood 10.4% below its price at entry. I added to the position twice during its lifespan, and the decline from my basis was 12.2%.

The position was structured as short vertical option spreads sold for a premium. The options' yield on risk was negative 50% -- a loss.

A Pharmacyclics Inc. (PCYC) bull signal broke above a six-week sideways trend that corrects from the latest peak in an uptrend that began in 2009. However, the price remains short of the highest high, $95.85, set March 6. Although the uptrend remains in place, so does the correction, until the price exceeds that high.

The most recent leg up began Nov. 7, 2012 from $44.91. The price more than doubled between that point and the peak. The correction carried down to a low of $71.85 on April 15. The bull signal was produced when the price broke beyond the 20-day price channel's upper boundary, $84.67.

The largest correction of the uptrend ended in early March 2011 at $4.75, which seems long ago and far away when compared to current price levels.

This is PCYC's fourth bull signal since the present leg up began. Two were profitable, for an average yield of 12.2%, compared to a loss of 9.4% for the unprofitable trade. in the period since the 2011 correction the 10 signals broke evenly between winning and losing, but with a far higher yield spread: An average profit of 54.1% for the winners vs. an average loss of 8.9% for the losers.

And even going back to 2009, when the broad markets began recovering from the post-recession crash, PCYC has shown strong momentum to the upside. Eight of the 15 completed bull signals were profitable, for an average yield of 66.5%, compared to a loss of 7.7% for the unprofitable signals.

The question any trader asks when looking at a chart like PCYC's is whether the train has left the station, the ship has left the dock, the profits have all been made, and the price is about to tank.

Those questions all assume that the market has a memory, and I agree that it does. They also assume that the market has a long-term memory stretching back five years that can be traced, like an EEG, on a simple candlestick chart.  Of that, in the high velocity year 2013, when trading horizons are measured in milliseocnds, I'm not so sure. I think it's likely that the market's memory is far more complex.

The wisdom of jumping in during a long uptrend is certainly worth questioning, but it's not ipso facto a deal killer.

Pharmacyclics is a Sunnyvale, California biopharmaceutical development company focusing on small-molecule enzyme inhibitors, something that I have zero understanding of. For me, at least, this company would fail the Warren Buffett test of being able to describe in a sentence or two what a company does.

Analysts, who presumably have more understanding than I do, are less than happy about PCYC's prospects. They give it a negative 18% enthusiasm rating.

The company's financials are quite respectable, with return on equity of 18.7% and no long-term debt.

Earnings are spotty, as I would expect from a drug development company. It has lost money in nine of the last 12 quarters, the biggest loss occurring in the most recent, the 1st quarter of 2013. It has made money in three of the 12 quarters .

The company has surprised to the upside and the downside six times each.

Institutions own 70% of shares, and the price has bid up to a ridiculously hopeful level. It takes $37.78 in shares to control a dollar of sales. Again, it's a development company, and the prices are based on the big payoff that, investors hope, lies ahead.

PCYC on average trades 730,000 shares a day and supports a remarkably good selection of option strike prices for a stock at that level of liquidity. Open interest runs to three figures, and the front-month at-the-money bid/ask spread on calls is 6.2%.

Implied volatility is quite high, at 64%. It stands slightly above the mid-point of the six-month range.

Options are pricing in confidence that 68.2% of trades will fall betweek $71.63 and $104.27 over the next month, for a potential gain or loss of 18.6%, and between $80.11 and $95.79 over the next week. That's the sort of opportunity and risk that high volatility buys.

Calls have an edge in current trading, running at 55% above the five-day average volume, compared to 53% for puts.

The fair-price zone on today's 30-minute chart runs from $85.67 to $87.74, encompassing 68.2% of trades surrounding the most-traded price, $87.06. The stock opened this morning below the most-traded price but in the last two hours, with 2-1/2 hours before the closing bell, has moved above the fair-price zone.

Pharmacyclics next publishes earnings on Sept. 6.

Decision for my account: I opened bull position in PCYC, structuring it as a vertical credit spread of options expiring in June, short the $85 put and long the $80 put. The position provides a 5.6% cushion between the entry price and the breakeven point, and the potential maximum yield at expiration is 25.9%

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.