Sears, the 10th largest retailer in the United States, has been in trouble for some time, seeking ways to reverse declining sales in light of stiff competition and changing public tastes.
|SHLD 4 years weekly bars
So much of its stock movement has been driven by news, and the chart reflects that in the helter-skelter decline that began from $195.18 in April 2007.
I've tried to apply an Elliott wave count to the chart, and have failed. SHLD is simply tumbling to the beat of its own unique drummer.
What I can say is that SHLD in indisputably in a long-term downtrend, and the break below the September low (the arrow to the right of the chart) suggests a very near downtrend is in force as well.
Two symbols survived my initial screening last night, CONN and EPI. (See "Friday's Prospects".) Both were bull signals. I'm looking for bear signals until Congress and the White House resolve the debt ceiling issue.
So I looked further, using a different timespan for the screen, and came up with SHLD, highly liquid and bearish to the bone.
Hardly any analysts are following SHLD, itself a bearish sign.
The company reports return on equity of negative 12% with debt equal to 68% of equity, on the high side given that ROE.
The last 12 quarters show losses in nine of them, including two most recent. three were profitable.
Sears Holdings had upside surprises in four of the quarters, and surprised to the downside in the remaining eight.
Institutions own 73% of shares, and the price is in the cellar. It only takes 15 cents in shares to control a dollar in sales.
Given the state of Sears Holdings financially, the biggest risk I see is someone coming in to buy the company for a small fraction of its former worth but at a premium over the present share price. That would wreak havoc with my bear position.
SHLD on average trades 1 million shares a day and, in what is no doubt a tribute to its former high status, supports a moderate selection of option strike prices with open interest mainly in the three figures. The bid/ask spread on front-month at-the-money puts is 3.5%.
Implied volatility is running at 60%, above the midpoint of the six-month range.
Options are pricing in confidence that 68.2% of trades will fall between $45.45 and $64.57 over the next year, for a potential gain or loss of 17.4%, and between $50.42 and $59.60 over the next week.
Contracts are trading at a slow pace today, with puts at 87% of their five-day average volume and calls at 76%.
Sears Holdings next publishes earnings on Nov. 11.
Decision for my account: Sometimes, timing is everything. The problem with SHLD comes with the last line of the analysis.
If I open a bear position, I would construct it out of options expiring Nov. 20. The next earnings announcement comes before the November options expiration. Recent earnings have sent the stock price gapping down or soaring up. Therefore, the risk that a sudden news-based event would move my bear position instantly from profit to loss is quite high.
Given that risk, I won't be trading SHLD today. If the earnings announcement were after the November options expiration, I would take the trade.
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.