Monday, May 12, 2014

Monday's Prospects: Round 2

Eight symbols survived my first round of analysis over the weekend, five with bull signals and three with bear. (See "Monday's Prospects".)

Two of the bear signals, KMP and ICE, failed confirmation. The third, FMI on the small-cap list, has been trading for less than a year. My rules disallow trades on stocks that haven't traded for a year or longer.

All of the bull signals confirmed Friday's breakouts by continuing to trade above the 20-day price channel today. Two of them, BCA and FBP, have bearish charts, meaning that the breakouts came as upside retracements within downtrends. I'm a trend follower and so rejected them as counter-trend plays.

That left three symbols, all with equally bullish charts. To select among them, I brought in two fundamental measures.

One, which is new for me this week, is the PEG -- the price/earnings ratio adjusted by anticipated growth. A PEG below 1 means the stock is priced below the level implied by its growth rate; above 1 means that it costs more than its value as implied by growth.

From the PEG it's possible to derive the price level that growth implies. Sometimes this is termed the "fair price", which I think is a ridiculous concept when applied to open markets. I prefer to call it the "PEG price".

GD and CSC are trading at more than double their PEG prices, whereas AL's PEG price is only 42% below the market price, making it the greatest bargain among the three. AL opened today at $39, and its PEG price is $68.03.

I also looked at the Zacks rating, which relies in part on the analyst consensus. Zacks is neutral on GD and CSC but gives AL a bullish rating.

AL's drawback is that it has insufficient open interest on its options to support a leveraged play; any position I open in AL will be structured as long shares.

But, under my rules, I can't trade AL yet. The bull signal from AL came after the market close on Thursday, so I can't consider the breakout confirmed unless AL breaks above Tuesday's 20-day price channel, the day I refer to in my rules as "Reset Day".

The goal of the delay is to give the markets a chance to absorb the earnings and make a reasoned decision about how to assess AL.

So AL goes on the Watchlist for consideration on Tuesday.

I next turned to the special list of large-cap bear signals, hoping to find something worth a closer look even if the historical odds of success weren't greater than even.

Of my two choices, MT failed confirmation, leaving SO on the table.

But SO is a high-dividend stock, with an annualized payout at today's prices of greater than 4%. A short position in a stock like that is a waste. Also, a dividend that high gives built-in bullish support to the price, making a bear play somewhat contrarian.

On the other hand, SO has a very high PEG price, more than four times the market price, which is what I want for a bear play.

The chart at first glance is a bit ambiguous. On the three-year chart it has completed a three-part zig-zag to the downside, meaning that I would expect the next move to be an uptrend.

On balance, I'm passing on SO, mainly on the basis of the high dividend. I won't be writing up any symbol from today's prospects list and shall instead concentrate my attention on find plays under my longer-term rules.


My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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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