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.