The position was structured as long shares and yielded 7.5% over 34 days, for an annualized yield of 80.8%.
Conn's Inc. (CONN) broke above its 20-day price channel on Friday and confirmed the bull signal by trading still higher on Monday, to an all-time high of $59.27.
CONN has been in an uptrend from $3.12 since November 2010 and has been rising continually, from $14.40, with no correction lasting more than three weeks since June 2012.
|CONN 90 days 2-hour bars|
That's an attractive package of momentum buttressed by robust historical odds of earning a profit. Since June 2012 CONN as completed three bull signals, all of them profitable, with an average yield of 32% over 58 days.
CONN is also attractive to the school of traders that believes the markets are throwing one last party before the Federal Reserve takes away the punch bowl and slows its support of low interest rates.
That belief gained credence when the S&P 500 experienced a break to the downside from May 22 to June 24 in an outsize reaction to remarks by Fed Chairman Bernanke. CONN, however, has only a 0.18 correllation with the S&P 500, where -1 is perfectly uncoordinated and 1 is perfectly coordinated. (Zero on the chart is a random walk.)
The chart, certainly, shows that CONN had found a secret stash of Jack Daniels to keep the party going while the blue chips were staring sadly at an empty punch bowl.
Using Elliott wave analysis, I can count CONN as being in a fifth-wave up since March. However, the count is uncertain, as is often the case with lower-volume stocks, and even if it is a fifth wave, the scale gives room for profit in the coming weeks and months. However, the count cautions me as a trader to be ruthless in exiting if the chart turns against me.
CONN was one of three symbols from Friday that survived initial analysis. CPRT has clearly moved into a downtrend on the weekly chart, and HRL appears to be heading that way, although it has yet to set a lower low to confirm it. Both CPRT and HRT had lower winning yields than CONN's.
Conn's, headquartered in Beaumont, Texas sells big-ticket durable items for the home, such as dining room sets, refrigerators, mattresses and lawn tractors, through a chain of stores in Texas, Louisiana, New Mexico and Oklahoma.
Analysts are bullish on its prospects, in aggregate giving it a 67% enthusiasm rating.
The company reports a respectable return on equity of 15%, with long-term debt running at 58% of equity.
Earnings have been rising steadily since the 4th quarter of 2012 after six quarters of helter-skelter reports.
Institutions own 75% of shares, and the price has been bid up to the point where it takes $2.26 in shares to control a dollar in sales.
CONN on average trades 379,000 shares a day, sufficient to support a moderate selection of options strike prices with open interest in the double digits, except for the front month's first out-of-the-money calls, which have four-figure open interest, suggesting to me that traders are seeking bullish leverage rather than hedging their bets through spreads.
The front-month at-the-money call spreads have a 6.8% bid/ask spread.
If I trade CONN, it will be as shares. I don't trade unhedged options, and the open-interest pattern won't allow me to construct a spread that will meet my standards.
Fortunately for shares traders, CONN has relatively high implied volatility of 38%, compared to 14% for the S&P 500. That suggests that CONN has the basic ability to make money even without leverage.
Options are pricing in confidence that 68.2% of trades will fall between $52.00 and $64.70 over the next month, for a potential gain or loss of 10.9%, and between $55.30 and $61.40 over the next week.
In Monday's trading both calls and puts were running well above their five-day average volume, 9.5 times average for calls and 8 times average for puts. These are not levels that I've seen often.
The fair-price zone of Monday's 30-minute chart ran from $57.86 to $59.24, encompassing 68.2% of transactions surrounding the most-traded price, $58.76. CONN began below the zone, rose to its ceiling, and ended the day below the most-traded price.
Conn's next publishes earnings on Sept. 2.
Decision for my account: I intend to open a bull position in CONN on Tuesday, structuring it as long shares, unless its chart changes dramatically. I'll post an update should such a change occur.
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.
Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.
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.