Wednesday, October 23, 2013

HUB.B: Clarity and confusion

Hubbell Inc. Class B shares (HUB.B) pushed above their 20-day price channel on Tuesday, sending a bull signal. The last time that happened, in mid-September, it proved to be a head fake, as the price immediately dropped back and a few weeks later gave a bear signal, which also proved to be a head fake of sorts.

So even though today's trading has confirmed the bull signal, albeit with little in the way of upside momentum, the cautious trader will treat HUB.B as the boy who cried "Wolf!".

HUB.B peaked at $113.09 on Aug. 1 after a long rise from its 2009 Great Recession low of $22.05 and has moved into a period of correction.

The near term chart shows HUB.B's situation with a great deal of clarity. I can say from the outset that HUB.B isn't suitable now as a short-term bull play. The chart is correcting an uptrend, I'm a trend follower, therefore, it's not a bull play.

For the future, the question is what precisely the correction is correcting. If HUB.B completed a five way pattern from 2009 to the peak, then the entire rise will ultimately be corrected.

HUB.B 5 years 3-day bars (left), 90 days 1-hour bars (right)

But the long count is ambiguous and a source of confusion. I've put a possible count on the chart that labels the $113.09 peak as the end of wave III, which would allow for a correction that could carry as low as $50, the length of wave II, to be followed by a further rise above the peak.

The best alternate count would make the $113.09 peak the termination of wave V, which would allow for a correction that could carry as low as $22, the entire run-up from 2009.

Trend channels can often clarify a chart. The channel for my preferred count, in black, contains the trend. The alternate count channel, in red, quickly veers from the course of the price.

The other evidence for counting the $113.09 peak as the end of wave III is the Elliott wave rule forbidding wave III from being the shortest of the three waves in the direction of the trend.

That requirement would be met under my preferred count if wave V is longer than wave I, a substantial rise. The alternate count already violates the rule, since it leaves Wave II as the shortest.

The choice between wave III and wave V will become critically important if the price moves above $113.09. If that price ended wave III, then HUB.B is likely beginning a substantial uptrend; if wave V, then the rise is a head fake of the type known in the Elliott wave universe as a throwover.

HUB.B was one of seven stocks that survived initial screening overnight, all having broken out to the upside. (See "Wednesday's Prospects".)

I eliminated BBT, CAG and OMC because of bearish ratings by Zacks; I prefer in my trades that the Zacks ratings match the trend.

The most liquid symbol, SLV, is in a marked correction; I don't do counter-trend trades.

That left HUB.B plus two illiquid over-the-counter symbols, PUBGY and LRLCY. I chose to follow the liquidity for my analysis.

Hubbell, headquartered in Shelton, Connecticut, makes the infrastructure that holds together the electrics and the electronics that fill modern houses and commercial buildings, the small and not-so-small knick-knacks that tie everything together into a working whole. It has been in that business since 1888.

Companies like Hubbell aren't flashy. They work behind the scenes, and that I think is a source of strength. They can earn money across a broad segment of business, rather than restricting themselves to a narrower niche as retail manufacturers must do.

Analysts are less than excited about Hubbell's prospects, giving it a negative 14% enthusiasm rating.

The company reports a solid return on equity at 18%, but with debt a bit higher than I like, at 33% of equity.

Profits tend to peak in the 3rd quarter, which covers the summer building season, and the last three 3rd quarters have shown increasing profits over the year before. Earnings have surprised to the upside in 11 of the last 12 quarters. The one downside surprise came in the 1st quarter of the present year.

Institutions own 88% of shares, and the price has been bid up to where it takes $2.03 in shares to control a dollar in sales.

HUB.B on average trades 159,000 shares a day. Its options lack sufficient open interest for me to trade, so any position I open would be structured as shares.

Implied volatility stands at 25%, near the middle of the six-month range. It has zig-zagged widely without a trend during that period.

Options are pricing in confidence that 68.25 of trades will fall between $100.68 and $116.14 over the next month, for a potential gain or loss of 7.1%, and between $104.70 and $112.12 over the next week.

Options today are skewed toward calls, which are running at 72% of their five-day average volume. Puts are running at only 36% of average volume.

Hubbell Inc. next publishes earnings on Jan. 20. The stock goes ex-dividend on Nov. 26 for a quarterly payout yielding 1.84% annualized at today's prices.

Decision for my account: I'm passing on HUB.B for the reasons noted in my chart discussion above: It's not in an uptrend, and so by my rules I can't trade a bull breakout.

The low liquidity means that it's impossible for me to do bear trades in HUB.B, so any position will need to await the working out of the longer-term trend that I discussed.


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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