Shares gained 3.6% over the nine-day life of the position, or $146.3% annualized.
Update 3/12/2014: I've closed my bull position in TAYC. The chart suggests that wave C {-1} to the downside has begun after a reversal from the March 7 peak of $25.04. The C wave under the Elliott wave rules could fall below $21.44.
If wave C {-1} has indeed begun, then I won't re-enter TAYC unless there's a new trading signal. If the price reverses and rise above $25.04, then I'll roll back into the position. For now, I'm putting TAYC on the roll shelf until I see what happens.
Click on chart to enlarge.
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| TAYC 90 days hourly bars |
Update 3/3/2014: I've opened a bull position in TAYC, structuring it as long shares because the options have such low open interest. Also, the front-month at-the-money bid/ask spread on calls is 230%, which is far wider than I would ever pay.
Taylor Capital Group Inc. (TAYC) was the lone small-cap signal from Thursday to survive my second round of analysis.
When the blue chips are in a mature trend, as they most certainly are these days, I'm partial to small caps, which tend to march to the beat of a different drummer. I haven't done a rigorous study, but my impression is that small caps are less likely to move in lockstep with the S&P 500.
Taylor Capital, however, isn't one of those outliers. Its chart matches the major index turning points quite well over the past five years.
The main reason to look at TAYC is the chart, which provides an unusually precise target range for trading.
The Chart
TAYC began its present uptrend on April 22, 2013 from $12.97. On Thursday it broke above its 20-day price channel, at $23.37, and confirmed the bull signal by trading still higher on Friday.
My Elliott wave count places TAYC in wave 5 of wave 5 {+1} of wave 3 {+2} to the upside.
Click on chart to enlarge.
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| TAYC 5 years weekly bars (left), 1 year daily bars (right) |
Elliott-wave analysis requires that the third wave not be shorter than both the first and fifth waves. A third wave cannot under any circumstances be the runt of the litter.
If it comes out that way in a count, then the count is wrong.
So much of the task of fitting Elliott to frame a chart consists of ensuring that the third waves come out right.
My concern with TAYC is the internal count of wave 5 {+1} from last April. The first wave is the longest, spanning $10.19. Wave 3 is considerably shorter, covering only $6.01.
In Elliott, that means that wave 5 must be shorter than $6.01 to avoid wave 3 coming in as the shortest.
Wave 5 by my count began on Feb. 3 from $21.46. It must end at or below $27.46.
Another Elliott rule requires wave 5 to move beyond the end of wave 3, which means it must exceed the $27 peak of Dec. 26, 2013.
This provides an unusually narrow target range from TAYC: The price must gain at least 14.4% over Friday's close, but it cannot gain more than 16.4%.
That assumes, of course, that my count is correct. Elliott is not an infallible predictor, although it is excellent at knocking down flawed expectations as the market continues along its course.
The shallowness of the wave 2 correction from July 24 to Aug. 30, 2013 is unusual. It is only 21.3% of the wave 1 rise, failing to touch even the first of the major Fibonacci retracement levels, 23.6%. That's not a deal killer by any means -- it breaks no rules -- but it's worth noting.
In any case, my count will be shown to be in error if TAYC reverses below $27 and falls to below $21.46. It will also be shown as erroneous should it move above $27.46.
Odds and Yields
TAYC has shown a lot of upside momentum in its wave 5 {+1} rise from April 2013. It has completed two bull signals, both profitable, each on average yielding 25.7% over 63 days. That is quite impressive.
The Company
Taylor Capital, headquartered in Wheeling, Illinois, owns Cole Taylor Bank, which is the sixth largest bank in Chicago, with nine banking centers in Chicagoland. The company prides itself on its hands-on management and service, saying that the company "focuses on closely-held businesses and the people who own and manage them".
To me, the niche sounds much like the old community bank, where the bank president had intimate knowledge of his customers' business needs. Successfully implementing that mid-20th century strategy in a complex market like 21st century Chicago must be a challenge.
Taylor reports return on equity of 17% with debt running to 24% of equity. It falls just short of being a growth stock by my standards.
Earnings in the last three quarters of 2013 came in below their year-ago counterparts. The first three quarters of last year all surprised to the downside.
The company has been profitable for the last 10 quarters, following a string of losing quarters in 2010 and 2011.
The earnings yield is 6.43%, which is comparable to other regional banks. It pays no dividends.
The stock is priced at 15.6 times earnings, and also has a premium to sales. It takes $2.10 in shares to control a dollar in sales.
Institutions own 28% of shares. The company next publishes earnings on April 14.
Liquidity and Volatility
TAYC on average trades 39,000 shares a day had has a small selection of option strikes mainly spaced $2.50 apart. There is no open interest, and any trade I place would be structured as long shares.
Implied volatility stands at 90%, which is in the 82% percentile of the one-year range. If I were trading options, which I'm not, I would go with short vertical option spreads, such as bull put spreads, sold for credit and expiring in April.
Options are pricing in confidence that 68.2% of trades will fall between $17.50 and $29.70 over the next month, for a potential gain or loss of 25.9%, and between $20.67 and $26.53.
Bottom line: This is a really volatile stock, which is why I sort of love the small caps.
Decision for My Account
I see no objective reason not to open a bull position in TAYC, structured as shares. I do have a fairly large exposure at this point to regional banks, and I'll need to think about that as I make a final trading decision.
I'll update this analysis on Monday with my final decision.
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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