Thursday, April 24, 2014

MTB: A regional bank bull play

Update 4/24/2014: MTB closed above its breakout level, confirming the bull signal. It moved back above the breakout level in the last three minutes of trading. For the reasons state in the "Decision" section, I don't intend to take the trade.

As M&T Bank Corp. (MTB) is approaching its pre-recession high set in 2007, the chart suggests that the major resistance at that level will be overcome, positioning the symbol for a continued rise. The chart, however, says nothing about how difficult it will be to scale that rampart.

MTB at today's opening stood 0.9% below the 2007 high of $125.13, a day after it broke above the 20-day price channel, sending a bull signal.

However, as I was writing this analysis, MTB slipped below the breakout level and again entered the boundaries of the 20-day price channel. If it closes back in the channel, then the bull signal is void and no trade will be possible.

The Chart

Elliott wave analysis shows MTB is in the middle portion of its rise from March 2009, in the depths of the Great Recession.

That middle portion, wave 3 {+3} began in October 2011 from $66.40. The first wave one degree lower, wave 1 {+2}, peaked July 18, 2013 at $119.54 and was followed by an extremely shallow correction that failed to attain even the 23.6% Fibonacci retracement.

Click on chart to enlarge.
MTB 13 years weekly bars (left), 1 year daily bars (right)
There's nothing in the Elliott rules that forbids such a shallow correction but it does raise a red flag. I went over the count at deeper degrees and am convinced that I've gotten it right. If I got it wrong, the error would be on the side of even greater upside potential, so it would be a winning error.

My count places MTB in wave 3 of wave 1 {+1} of 3 {+2} of 3 {+3}.

Odds and Yields

MTB has had an even chance of producing a whipsaw in the wave 5 {+1} rise that began a year ago, with four bull signals, two winners and two losers. Successful trades had the edge, however, on average yielding 6.2% over 35 days, compared to a loss of 1.3% over 27 days for the unsuccessful trades.

Longer term, the rise has produced 11 bull signals. The seven successful plays yielded 5.5% over 41 days on average, compared to a loss of 3.7% over 19 days on average for the failures. The win/lose yield spread over this longer period is only 1.8%, not terrible but nothing to cheer about.

The Company

M&T Bank, headquartered in Buffalo, New York, is a regional bank-holding company with two subsidiaries, M&T Bank and Wilmington Trust and the National Association (Wilmington Trust N.A.). It operates more than 750 branches in eight eastern states and the District of Columbia.

Analysts are far from sanguine about M&T Bank's future, collectively coming down with a 63% negative enthusiasm rating.

The company reports return on equity of 11% and debt amounting to 59% of equity.

It has been profitable for at least the last three years, with earnings having peaked for that period in the 2nd quarter of last year and having dropped steadily thereafter.

It has surprised to the upside seven times and to the downside four times.

The earnings yield is 6.35%, comparable to other regional banks. The company also pays a dividend yielding 2.28% annualized at today's prices. The dividend yield is 36% of the earnings yield.

The stock is selling at 16 times earnings and at a high premium to sales. It takes $3.53 in shares to control a dollar in sales.

Institutions own 84% of shares.

M&T Bank goes ex-dividend in May for a quarter payout of 70 cents per share.

Liquidity and Volatility

MTB on average trades 862,000 shares a day and supports a moderate selection of option strike prices spaced $5 apart. Open interest is mainly non-existent.

The front-month at-the-money bid/ask spread on calls is huge, at 36%. By comparison, the most heavily traded symbol on the markets, the exchange-traded fund SPY, which tracks the S&P 500, has a spread of 0.8%.

MTB's options are too illiquid and the spread too wide for me to trade. Any position I open will be as long shares.

Implied volatility stands at 16% and has been trending sideways since November. Volatility stands in the 57th percentile of the one-year range and is only slightly higher than volatility on the S&P 500, which is 14%.

Historic volatility is also 14%.

Options are pricing in confidence that 68.2% of trades will fall between $117.04 and $128.44 over the next month, for a potential gain or loss of 4.6%, and between $120 and $125.48 over the next week.

Contracts today are heavily tilted toward puts, which are running at 2-1/2 times their five-day average volume. Calls are running at 29% of average.

Decision for My Account

The decline below the breakout level in afternoon trading calls the bull signal into question. I handle this as I do any bull play: If the symbol shows momentum to the upside in the half hour before the closing bell, then I can place the trade.

I've purposely left "momentum" undefined, allowing me to adapt to the specific situation. My subconscious assessment for the feel of the chart comes into play, and I'm comfortable with that. I've viewed a lot of charts.

"Momentum" for me could mean a rise in the last half hour that still remains below the opening price, it could mean a close above the opening price, and in this case, it definitely means a close above the upper boundary of the 20-day price channel, at $122.86.

Non-confirmation aside, there are things I don't like about MTB. The low volatility, nearly as low as the VIX, limits my profit in return for risk. The odds suggest a significant likelihood of whipsaws, and the low win/lose yield spread on the rise since 2011 suggests that it's not a risk worth taking.

I'll update this post with where MTB closed in relation to the breakout level, but even if the bull signal is confirmed, I don't intend to trade this symbol.


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.

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 decisions for his or her own account, and take responsibility for the consequences.

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