During the 17 days I held my bull position, WDR's price declined by 1.6%, or 35.3% annualized.
Click on chart to enlarge.
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| WDR 3 years 2-day bars |
Update 1/7/2014: I've opened a bull position in WDR, structuring it as long shares. The price pattern that past two days has been for the stock to open high and then decline slightly. Today was different because the price showed a short-term uptrend in the last 20 minutes before the closing bell, and that was enough to persuade me to make the trade.
Waddell & Reed Financial Inc. (WDR) is in the final stages of a rise beginning in June 2012 from $26.55, and more broadly, in the middle portion of a rise starting in November 2008 from $8.57.
Friday's break above the 20-day price channel, which sent a bull signal, marked renewed momentum after a very near term sideways correction from Dec. 23, 2013 to Jan. 2, 2014.
The Chart
The Elliot wave count labels the present uptrend as wave 3 {+3}. After it ends, it will be followed by a fourth-wave correction of the 162% rise over 19 months.
Click on chart to enlarge.
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| WDR 2 years 2-day bars (left), 20 days 15-minute bars (right) |
Those correction lows are calculated from today's high of $66.89, which isn't necessarily the peak of wave 3 {+3}. There may well be upside remaining for this trend.
However, the end of wave 3 {+3} is near. By my count, WDR within that wave is in wave 5 {+2} of wave 5 {+1} of wave 5. Once those fifth waves complete their course, then the {+3} degree correction will begin.
Very tentatively, I count wave 3 {-2} from $64.57 on Jan. 2 as being in a fourth wave correction, to be followed by a wave 5 {-3} to the upside. Counts at the very short term degrees are notoriously unreliable, so I place to great faith in my {-3} degree analysis.
If I'm wrong in one direction, then wave 4 {-3} is in fact the start of wave 4 {-2} to the downside. If I'm wrong in the other direction, then wave 4 {-3} is in fact wave 2 {-3}, giving wave 3 {-2} more upside potential.
In either case, my trading practice requiring momentum in the direction of the trade during the last half hour before the closing bell should keep me from opening a position if the count is indeed against me.
WDR's momentum to the upside hasn't been a standout when it comes to reliability. Bull signals have tended to break evenly between the winners and losers.
I measure reliability by the ratio of successful to unsuccessful signals. WDR's 50% rate isn't particularly reliable, but its far from being a total head-fake stock.
There have have been 10 prior bull signals since the start of wave 3 {+3} in June 2012. The profitable half yielded 8.7% each over 36 days on average, and the unprofitable trades lost 6% over 10 on average.
WDR has completed two bear signals since wave 5 began in September 2013. The winner yielded 18.2% over 37 and the loser went down by 1.1% over 20 days.
The relative yield provides a measure of the magnitude of the momentum,and in this area wave 3 {+3} is a stand out, with a win/lose yield spread of 17.1%. The nearer term wave 5 is far weaker, with a spread of 2.7%.
The Company
Waddell & Reed Financial, headquartered in Overland Park, Kansas, is an asset management and financial planning company that serves both the retail and wholesale markets. It defines itself as an old-line company, noting prominently on its website that it was founded in 1937 and using "enduring" and "proven" to buttress its creds.
Analysts are far from optimistic about the company's prospects, collectively coming down at a negative 78% enthusiasm rating.
Their opinion flies in the face of the company's returns. Waddell & Reed reports return on equity of 41% with long-term debt amounting to only 31% of equity.
Profits have been steady rather than trending, although the most recent quarter 44.3% pop over its year-ago counterpart.
Earnings have surprised to the downside five times in the past three years, and to the upside seven times.
The earnings yield is 4.02%, lower than 63% other investment services companies. The dividend yield is 2.06%, or 48.6% of earnings.
The stock is selling at 24.9 times earnings, and shares are also at a premium to sales. It takes $4.35 in shares to control a dollar in sales.
Institutions own 81% of shares.
Waddell & Reed next publishes earnings on Feb. 4. The stock goes ex-dividend on Jan. 9 for a 34 cent quarterly payout.
Liquidity and Volatility
WDR on average trades 453,000 shares a day, sufficient to support a small selection of options strike prices space $5 apart. Open interest is zero at most near-the-money strikes. Any trade I place must be as long shares.
The front-month at-the-money bid/ask spread on calls is quite wide, at 14.3%.
Implied volatility stands at 25% and is low, at the 30th percentile of the quarterly range. It has been in a sideways trend since mid-November.
Options are pricing in confidence that 68.2% of trades will fall between $61.11 and $70.75 over the next month, for a potential gain or loss of 7.3%, and between $63.62 and $68.24 over the next week.
Contracts are trading actively today, with calls running 142% above their five-day average volume and puts at 85% above average.
Decision for my account
The negatives are insufficient to block a trade. Although the rise from last September is in its final stages, that end game could take some time and provide opportunities for profit. I tend to ignore analysts opinion unless back by the financials, so the negative enthusiasm rating, when combined with steady earnings and a high return on equity, isn't at all troubling.
I intend to open a bull position in WDR, structuring it as long shares. I'll open it today if the price shows upside momentum in the half hour before the closing bell; otherwise, I'll add WDR to my Watchlist as a potential later trade.
There is, of course, some pressure to complete the trade before the stock goes ex-dividend on Wednesday, Jan. 9.
References
My shorter-term 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. The principal practitioner 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.
Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.
See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.
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.
Disclaimer
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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