Thursday, September 12, 2013

IPG: Bull play on Mad Men

Update 10/9/2013: I exited my bull position in IPG on Sept. 27 because of the downside risk of a U.S. government default. (See "Rolling away from risk".)  I put it on the roll shelf in hopes of re-entering once the political impasse was resolved. 

IPG was in a sideways trend when I exited. Three trading days later, it began to drift lower and fell below its 10-day price channel on Oct. 8, sending a signal that any positions should be closed. That signal ends chances of re-entry until the next bull signal. I've removed IPG from the roll shelf and calculated my results.

I held IPG shares for 11 days, and in that time the stock rose 2.2%, or 71.5% annualized. 

Update 9/13/2013: IPG regained its very near term momentum in the last half hour of trading, and I opened a bull position. However, I found it impossible to open a short vertical spread that worked. I simply couldn't get enough premium. So instead I bought long shares, forgoing the leverage and the hedge but still, I hope, positioning myself to gain some profit.

Update 9/12/2013: After a strong rise from the $16.82 opening price the first half hour of trading, IPG fell in the next five half hours, settling on $16.74 as its stopping point. It then challenged the opening price the next five half hours, managing to pierce it only once, moving to $16.83 for less than a minute.

In the last half hour it fell again to $16.74, hovering there with forays as low as $16.72 in the last five minutes. The higher level, however, proved able to attract sufficient buying interest to guard against a further decline. IPG closed at $16.74.

The chart isn't showing upward momentum and I won't be placing a trade today. I'll keep IPG on my watchlist as a possible trade if the uptrend reasserts itself in the next few days. Clearly, $16.83 is the price to beat.

Interpublic Group of Companies Inc. (IPG) has been rising since mid-November 2012, the second up wave (third wave) in a five-wave pattern composed of three up waves with two downward corrections interspersed, the Elliott wave definition of an uptrend.
IPG 3 years 2-day bars

The third wave has carried IPG from $9.38 up to $17.43 on July 29. The date is important, because it means that after peaking IPG corrected, down to $15.52 on Aug. 29.

The rise resumed from that point, breaking through the 20-day price channel on Wednesday and continuing higher today to $16.95, a level 2.8% below the peak attained  by the third wave so far.

It could well be that the decline off of the third wave peak marks the start of the fourth wave correction. The second wave correction trended sideways, and that increases the odds that the fourth wave will be a directional zig-zag to the downside.

For the latter to happen, IPG would typically reverse from a point below $17.43, tracing an a-b-c pattern, or down-up-down. The A and at least part of B are already in place. Wave c corrections of an uptrend are generally quite impressive in their unforgiving downward sweep.

Wave patterns are rarely perfect. For this pattern to come close to perfection, the third wave would continue to the upper boundary of the trend channel, now at about $18.85, before reversing in a fourth wave correction.

The third wave under Elliott wave doctrine cannot be the shortest rising wave in an uptrend. The IPG chart has already met that requirement, as the first wave is shorter than the third.

The first wave of the entire uptrend began in early October 2011 from $6.73.

This is IPG's third break above the 20-day price channel within the third wave. The two completed bull signals were successful, yielding 21.4% over 81 days on average.

The stock has completed six bull signals since the first wave began in 2011. Half were profitable yielding on average 18.4% over 73 days. Three failed, losing on average 7.8% over 14 days.

IPG was one of 21 symbols that survived my initial screening last night, all having broken out to the upside. (See "Thursday's Prospects".)

Eight failed confirmation, moving back within their 20-day price channels: ASCMA, CHTR, ILMN, KRC, LNC, RKT, SFG, and WST.

Seven were moving counter trend today -- falling intraday after a breakout to the upside: BIDU, DDAIF, JNPR, NIHD, WU, PL and MIDD.

One was in a downtrend when it gave a bull signal: RHP.

One, RES, is tracing what appears to be a triangle. Its options are too illiquid for me to trade, so I can't play the triangle pattern.

One had a bearish Zacks rating that ran counter to the bull signal: CAR.

One was a biotech company, a sector that I'm fully exposed to: CVD. In my style of trading, the more diversification the better.

That left IPG and FANG. The former had options with sufficient open interest for me to trade, and the latter did not. So I chose IPG for my analysis.

Interpublic Group, headquartered in New York, is one of the big four holding companies of global reach that dominate the advertising and marketing sector. Think of it as what Don Draper might have aspired to in Mad Men had his imagination been capable of soaring to greater heights.

If the economic recovery is indeed taking hold, and if the public will soon be out prepared to shop till we drop, then Interpublic will be poised to profit as it helps tell us where we should shop before exhaustion sets in.

Analysts are quite confident in Interpublic's prospects, collectively falling in with a 50% enthusiasm rating.

The company reports return on equity of 16% with a somewhat high level of debt, amounting to 69% of equity.

The company went public in January 2009 and has reported nine quarters of earnings. All were profitable, with each year peaking in the 4th quarter Christmas season, and the 2012 and 2013 quarters each came in with higher earnings than the year-ago quarter.

Interpublic has surprised to the upside in six quarters, and to the downside in three.

Institutions own 95% of shares, and the price is trading at par; it takes $1.01 in shares to control a dollar in sales.

IPG on average trades 2.6 million shares a day, sufficient to support a moderate selection of option strike prices spaced a dollar apart and with open interest mainly in the three figures at strikes I would use in building a position.

The front-month at-the-money bid/ask spread for calls is 11.1%, a bit broader than I like but not in itself a deal killer.

Implied volatility stands at 23% and has been rising in broad swings since early August.

Options are pricing in confidence that 68.2% of trades will fall between $15.59 and $17.87 over the next month, for a potential gain or loss of 6.8%, and between $16.18 and $17.28 over the next week.

Trading in options is quite lively today, with calls running at a bit more than four times their five-day average volume, and puts at nearly three times average.

Interpublic Group of Companies next publishes earnings on Oct. 21. The stock goes ex-dividend in November for a quarterly payout yielding 1.79% at current prices.

Decision for my account: I intend to open a bull position on IPG in the last half hour of trading, if it is showing an intraday gain. It was gaining when I started writing this analysis, and it has since moved to an intraday loss. If I open a position, I shall structure it as a bull put options spread, sold for credit and expiring in October. If the intraday decline is in place, then I'll revisit the trade on Friday.

The chart is risky, but the time frame I'm analyzing is quite broad. The second wave correction at that time frame lasted nine months. That suggests that there is time for the present fourth-wave correction, if that is indeed what it is, to play out before a catastrophic fall.

A bull put options spread makes money even if the price moves sideways, so whatever the wave, it is possible for the position to be profitable.


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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