Sunday, July 14, 2013

GIS: Processed foods bull signal

Update 8/15/2013: GIS gave an exit signal today. The shares had been awaiting a breakout so I could roll into a new bull position. The exit signal eliminates the possibility of a roll and triggers a calculation of the results.

I only held one position in GIS -- there were no rolls. The options were closed on Aug. 6 at small cost near their expiration.

The shares gained 2% during the 22 day life of the position. The options produced a 9.7% yield on risk.

Update 7/15/2013; I've opened a position as described below in the "Decision" section. The leverage is 2.6x, with a potential maximum yield of 11.5% and a 2.7% cushion of profitability at expiration.

General Mills Inc. (GIS) broke above the 20-day price channel on Thursday, and the bull signal was confirmed on Friday by continued trading above the breakout level, with the high for the day reaching an all-time high of $51.40.

The stock's most-recent leg up began in June last year from $36.75, a move that has produced four completed bull signals. Three were successful for an average yield of 6.3% over 45 days, compared to a 2% loss over 15 days for the unsuccessful trade.

GIS 2-year weekly
The glass-half-full crowd will marvel at the strength of the trend that continues to propel GIS to new heights. The glass-half-empty folk among us will fret that the stock has gone too far too fast and will use each new breakout as proof of the folly of trend chasing.

On the 2-year weekly chart, the upward move since last year can be counted using Elliott wave analysis as four waves with a fifth wave underway, suggesting a completion of the long upward move.

Elliott analysis, of course, can never speak authoritatively of when moves will happen, only what direction they are likely to be. So even a fifth wave completion can provide room for profit.

GIS was among 12 symbols that survived initial screening Thursday night. Three symbols failed confirmation on Friday. I limited my consideration of the others to symbols having sufficient liquidity for me to trade as options, leaving CIEN, SOS and GIS under consideration.

SOS is an 'ultra' exchange-traded fund, meaning it fund is leveraged, and options would produce further leverage. I don't trade such situations -- its more risk than I want to take on -- and so I removed SOS from the list.

GIS had better historical odds of success, and also a better chart of the glass-half-full variety. The CIEN chart shows a rise within a bull pattern. GIS also has far better financials than CIEN.

General Mills, headquartered in Minneapolis, Minnesota, is of course a household name in cereals, such as the iconic Cheerios and Wheaties, and also in other areas, such as Betty Crocker for baked-goods mikes and Green Giant for canned veggies.

The company has a wide following of analysts who, collectively, come down with a 40% enthusiasm rating, on the high side as these things go.

No doubt one factor fueling their enthusiasm is General Mills' return on equity of 25%, tempered by debt amounting to 83% of equity.

The companies earnings tend to peak in the last quarter of the year -- the company's second quarter -- and earnings in that period have risen consistently compared to its year-ago counterpart. Earnings have surprised to the upside eight times in the last 12 quarters, and to the downside four times.

Institutions own 67% of shares, and the price has risen above sales parity; it takes $1.84 in shares to control a dollar in sales.

GIS on averages trades 3.2 million shares a day, sufficient to support a good selection of option strikes prices with open interest running mainly to three figures. The bid/ask spread on front-month at-the-money calls is quite narrow at 1.3%.

Implied volatility is running at 16% and has taken an uptick the past two trading days after declining since mid-June.

Options are pricing in confidence that 68.2% of trades will fall between $48.70 and $53.48 over the next month, for a potential gain or loss of 4.7%, and between $49.94 and $52.24 over the next week.

In Friday's trading, options were tilted slightly to the call side, with call volume running 44% above the five-day average with put options running 30% above average.

General Mills next publishes earnings on Sept. 16. The stock goes ex-dividend in October for a quarterly payout yielding 2.98% annualized at today's prices.

Decision for my account: This trade meets my criteria for opening a bull position, although I've not yet done so. I'll look at it during Monday's session and if continues are unchanged, I'll make the trade and post notice here.

Using the information at Friday's close, I would structure the position as a short vertical options spread, short the $50 puts and long the $48 puts. The position provides a 2.9% cushion of profitability below the entry price.

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.

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