Friday, November 1, 2013

VMI: Bull signal on metal structures

Valmont Industries (VMI) has been in a downtrending correction as it set a 20-day high on Thursday. That contradiction -- a bull signal amid a bear trend -- is on the face of it a barrier to trading this less liquid stock.

A closer look at the chart, however, counsels against a hasty judgment.

VMI hit a peak of $164.3 on March 25, ending the recovery from the 2009 depth of the Great Recession, $37.47. It then began stair-stepping downward in a correction, although of what magnitude I find difficult to say.

The decline can be counted three ways, using Elliott wave analysis.

VMI 2 years daily bars (left), 20 days 30-minute bars (right)

My preferred count puts it in the middle of its downward course with an uptrending correction, wave 4, of the decline from the May 20 peak, $157.99.

The first alternate count sees it as a nine-wave extended trend with the present upward move, wave 8, destined to fall short of the Sept. 20 peak, $149.34.

The second alternate count sees the downward move as complete and the present rise correcting the decline from the March 25 peak, $164.93. An argument for the second alternate is that the move up from $129, the Oct. 18 low, can be counted as part of a five-wave move. That shouldn't happen in wave 4 under Elliott wave doctrine.

The preferred count sees a maximum upside potential of 13.7%; the first alternate, of 7.4%.; and the second alternate, of  18.6%. But in any case, the gain would most likely be less than the maximum, perhaps considerably less.

Also, the present trend that I've counted is far too small to be the completion of the rise from 2009. There will be much more downside potential ahead to complete that massive sea change in the chart.

Footnote: The extremely long-term chart -- 20 years -- shows VMI completing a five-wave rise from $6.75 in 1994. So, by the Elliott wave count, we're arguably in the beginning stages of a correction of the entire gain for the past 19 years. I don't claim any practical significant for that fact but find it to be interesting.

It will come as no surprise, given the downward cast of the chart, that VMI's odds of recent  successful bull trades are truly awful.

The stock has completed three bull signals since the March 25 peak. All were failures, on average losing 3.2% over 11 days.

VMI was the sole survivor of my initial screening overnight. (See "Friday's Prospects".)

Valmont Industries, headquartered in Valley, Nebraska, makes fabricated metal products, such as traffic lights, pedestrian bridge tube sections, structures for agriculture and mining, wireless communications towers, and much more.

Valmont is one of those old-line manufacturing companies that provide the infrastructure and landscape of our post-modern lives, and in fact without which those lives either wouldn't be worth living, or worst case, wouldn't be possible.

The company has manufacturing facilities in 92 locations throughout the world.

The small number of analysts following Valmont aren't overly excited about its prospects. They come down collectively at a negative 14% enthusiasm rating.

This is despite excellent balance-sheet numbers. Valmont reports a 20% return on equity with doubt on the low side amounting to only 30% of equity.

Earnings tend to peak in the 2nd quarter -- the summer construction season -- and that quarter has seen higher earnings year-over-year for at least the past three years. Earnings have surprised to the downside only once, the most recent quarter. The remaining 11 quarters of the period I'm looking at have surprised to the upside.

Institutions own 79% of shares and the price in near sales parity. It takes $1.14 in shares to control a dollar in sales.

VMI on average trades 366,000 shares a day. It supports a wide selection of option strike prices spaced $5 apart, but the two-digit open interest is too low for my trading standards.

The front-month at-the-money bid/ask spread on calls is 28.3%, which is way too wide for my taste. So any bull position I open in VMI will be structured as long shares.

Implied volatility stands at 22%, near the low point of the six-month range, and has been falling from 33% on Oct. 17.

Options are pricing in confidence that 68.2% of trades will fall between $133.28 and $151.16 over the next month, for a potential gain or loss of 6.3%, and between $137.92 and $146.52 over the next week.

Contract trading today is tending toward calls, which are running at 96% of their five-day average volume. Puts are at only 11% of average volume.

Valmont Industries next publishes earnings on Feb. 13. The stock goes ex-dividend in December for a quarterly payout yielding 0.7% annualized at today's prices.

Decision for my account: I see the upside potential of the chart, but it is still a downtrend, and a bull position would be a counter-trend trade except for the very near term, meaning the rise from Oct. 31 -- yesterday.

I'm passing on this trade and won't open a bull position on VMI as a result of this bull signal.


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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