Thursday, September 19, 2013

FIG: An exotic playground

Update 10/9/2013: FIG moved below its 10-day price channel with out ever confirming its bull signal. I've removed it from the Watchlist.

Update 9/19/2013: FIG lost momentum in the waning minutes of the trading day. I didn't open a position.

With a bit more than three hours left in the trading day, FIG came off of its high of $8.19 and swiftly tumbled by about a dime, where it became stuck at around the $8.09 and $8.10 level. 

In my analysis below I mentioned the most recent very near term resistance, $8.13, on July 30. That high had companions, at $8.10 on Aug. 1, and at $8.09 on Aug. 2 and again on Aug. 14. The stock went nowhere on Aug. 2, but the next day it tumbled on a huge volume spike, nine times the average. 

With that history, it is no wonder that FIG is struggling to move persistently above the $8.09/$8.10 level. People left standing when the game of musical chairs ended, people who bought on the high volume day, want to close out with a small profit, or even none at all.

With 15 minutes before the closing bell, FIG capitulated and dropped below the resistance point. In the last five minutes of trading the price ranged from a high of $8.02 to a low of $8.

I'll add FIG to my Watchlist and consider it for a trade if it exceeds $8.13, with a push to a higher high above $8.19 making an even more persuasive case.

Fortress Investment Group LLC (FIG) continues to trace a series of higher highs and higher lows in an uptrend that began June 27, 2012 from $3.04.

Its most recent very near term peak was set July 30 at $8.13. It is that level that FIG was challenging as it broke past its 20-day price channel on Wednesday and confirmed the bull signal by continuing to rise today.

The stock has set a high today above that peak, at $8.18 so far.
FIG 10 years weekly bars

FIG does not count well using Elliott wave techniques, so I won't even try. It is an investment company and so is subject to forces that differ wildly from the goods and services enterprises that comprise most stocks traded.

The broad pattern of the FIG chart is that its initial post-recession rise from March 2009 was followed, beginning in September that same year, by a wide sideways movement running roughly from $2.75 to its peak, $6.97, attained on March 1, 2011. It is that peak that FIG broke above in July 9.

It is also noteworthy that upon first challenging that resistance level, last March, FIG stumbled, and stumbled again after the July breakout, and stumbled again in August.

Certainly FIG has assembled an excellent record of success in its rise from June 2012.

Wednesday's bull signal was the sixth of the bull trend. Three of the completed signals were successful, on average yielding 19.4% over 56 days. The two failed signals lost 1.3% over 26 days. That produces a quite high 18.1% win/lose yield spread.

FIG was one of 34 symbols that survived my initial screening last night. In "Thursday's Prospects", I noted what an unusual day it had been. The Federal Open Market Committee executed a major reversal from what it had led traders to expect in near-term monetary policy. The market as a whole reacted with a sharp rise.

Under my rules I have discretion about trading signals that are generated by news events, and most of what happened in the markets on Wednesday falls into that category. My discretion generally tells me to avoid news-driven trades, since the publication of the news removes all ambiguity, and therefore is already reflected in the stock price.

To screen out the signals mainly resulting from the news, I screened the 34 symbols on a three-day chart with half hour bars, and rejected those whose uptrend began at 2 p.m. New York time on Wednesday, the time of the FOMC announcement.

That screen removed nine symbols from consideration: ELN, CTXS, AEE, NXST, SPR, RHI, ECPG, MDP and GK.

I also devised a screen I call "too far too fast" and removed two more symbols, VIPS and DWRE, from consideration. They rose sharply on Wednesday's daily chart, and again today, after trending sideways in the prior week.

Fourteens symbols were moving down intraday, contrary to the direction of their signal, and so were removed from consideration: AMAT, ANDE, CRI, CSH, DNZOY, HRL, HURN, JJSF, NPO, OI, PEB, RDN, TTEC and WEX.

Four fell back within their price channels and failed to confirm their bull signals: COLB, FIATY, SCOR and TAM.

Three had earnings announcements within the next 30 days pop up on the schedule that had not shown up the day before: BLK, EGP and SVU. I don't open new positions on companies within 30 days of an earnings announcement.

And I kicked out one symbol, TNA, because its an ultra exchange-traded fund that uses various techniques to boost its yield to a multiple of the underlying ETF. I generally don't play funds of that type, preferring to get my leverage in ways that are more under my control.

FIG, the survivor, was already on the rise for days before the FOMC reversed course and so avoided being tagged a news-based bull signal.

Fortress Investment Group, headquartered in New York City, trades private equity funds, liquid hedge funds and credit funds. The underlying assets involve fixed income, currency, equity, commodities and their derivatives.

FIG's playground is somewhat removed from that of the average trader. It has an exotic air, the kind that implies greater promise, but also enhanced danger.

It also owns companies outright, such as the Sheraton Grande Tokyo Bay Hotel and the Dow Jones Local Media Group.

Fortress says that private equity accounts for 72% of its investments.

Fewer than a handful of analysts follow Fortress, and they are in aggregate perfectly balanced in their opinions, with an enthusiasm index of zero.

The company reports return on equity of 25% with no long-term debt, putting it in growth stock territory by my reckoning.

It has been profitable during the last 12 quarters that I'm using in this analysis but without a trend; earnings have been all over the map. The most recent quarter, the 2nd of 2013, showed earnings rocket up to nearly five times those of the year-ago quarter.

Fortress has produced seven upside earnings surprises, and five to the downside, the most recent being the 1st quarter of this year.

Institutions own only 33% of shares, which is quite low, although that's not to say that they don't keep their money in Fortress investment funds. The price has been bid up considerably. It takes $3.48 in shares to control a dollar in sales.

FIG on average trades 765,000 shares a day and supports a moderate selection of option strike prices spaced $1 apart.

However, they have very low open interest -- zero for most strikes, even those just out of the money, and so aren't liquid enough to meet my preferences. Any position I would open in FIG would be structured as long shares. That also makes sense because of the company's high dividend of nearly 3% annually.

Implied volatility stands at 30%, near the lowest level of the last six months, and has fallen sharply from the 40s beginning Wednesday.

Options are pricing in confidence that 68.2% of trades will fall between $7.44 and $8.88 over the next month, for a potential gain or loss of 8.8%, and between $7.82 and $8.50 over the next week.

Call options are trading at an extreme level of activity today, with volume running 11 and a half times the five-day average. Puts are trading at one and a half times average volume.

Fortress Investment Group next publishes earnings on Oct. 28. The stock goes ex-dividend in November for a quarterly payout yielding 2.95% annualized at today's prices.

Decision for my account: FIG's break above its very near term resistance of $8.13 removes the one reservation I have about the chart. I intend to open a bull position in FIG in the last half hour of trading today if it continues to show momentum and shall update this posting with my final decision near the market close 


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

I use the number 68.2% in using applied volatility to calculate the expected trading range. 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

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

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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