Tuesday, September 23, 2014

RYL: Bearish on a homebuilder

Update 11/24/2014: RYL has moved above the $38.80 high set on Sept. 17, a few days before I entered the position. It continued the downtrend that began last spring to a low of $30.33 on Oct. 13, and then reversed in a leg up that today confirmed a break above the prior high, thereby moving to an uptrend.

I had exited my bear position a week after the Oct. low, placing it on the Roll Shelf for possible re-entry if the price moved in my favor. It didn't, and with the move to an uptrend, I have moved RYL from the Roll Shelf and calculated results.

During the 27 day lifespan of my position, RYL's price declined by 2.4%, or 32.8% annualized. My options position produced a 3.9% loss on debit, or 52% annualized.

Click on chart to enlarge.
RYL 180 days 4 hour bar

Update 10/20/2014: RYL moved above its stop/loss point on Oct. 15, the day it went ex-dividend. Under my rules there is a five-day day break before confirmation. That day came on Friday, the exit signal was confirmed, and higher trading today gave a second confirmation.

So I've closed the position, even though I'm not at all persuaded that the stock has entered an uptrend. This is one of those cases where the old adage about following your trading rules defines success is a bit painful to endure. 

Note to self: Revisit trading rules with an eye toward a revision, given the fact that the market has gotten past the churning of its top and has entered a downtrend.

RYL remains below the upper boundary of the 10-day price channel, so it is eligible for a roll forward into a new position if it meet the criteria. I'll refrain from calculating profit or loss until no further rolls are possible.

Update 9/23/2014: I've opened a bear put spread on RYL, long the $36 put and short the $35 put and expiring Jan. 15. The leverage is 4:1. 

RYL is up intraday but stayed below its breakout level and its opening price of the day before. It set a lower high and lower low for the day, and that counts as a downtrend.

The Ryland Group Inc. (RYL) is a homebuilder and like everyone in the sector has seen a massive collapse in business followed by an optimistic recovery. The chart, however, suggests that happy days, far from being here again, may be taking a vacation.

The Chart
RYL hit its pre-recession peak earlier than most, $83.25 in 2005, and then tumbled, reaching its post-recession valley later than most, in October 2011.

Since that low, at $9.15, it has since traced a counter-trend recovery, hitting a high of $50.42 on May 20, 2013, before again pulling back to the downside.

Click on chart to enlarge.
RYL 10 years weekly bars (left), 16 months daily bars (right)
My count under Elliott wave analysis, places the 2011 low as the end of wave A {+3} to the downside.

RYL is present working its way through wave B {+3} to the upside, which is itself composed of three lettered waves -- a rising A {+2}, which produced the May 2013 high, a falling B {+2}, now underway, and to come, a rising C {+2}, which is likely to exceed the May 2013 high of $50.42, but to fall short of the 2005 high of $83.25.

Wave A {+2} lasted for nearly two years, and so wave B {+2}, if it is proportional, will carry the downtrend into 2015 before the next correction begins.

Internally, wave B {+2}, if it is typical, will work out as a three-wave sequence, or perhaps multiples of correction patterns. I've analyzed B {+2} internally as workings its way down its first wave, A {+1}, with three out of five waves of the base degree complete.

Odds and Yields

RYL has completed four bear signals since wave B {+2} began in May 2013. Three were successful, on average yielding 9.6% over 58 days. The one unsuccessful trade lost 9.1% over 18 days.

The half a percent win/lose yield spread is unimpressive, but the 3:1 odds in favor of success make up for the narrowness of the gap.

The Company

Ryland, headquartered in Westlake Village, California, builds homes and finances the mortgages. It ranks six among companies building new homes.

Stock analysts collectively give Ryland a negative 20% enthusiasm rating, a reading somewhat short of optimism in assessing the company's prospects.

The company reports return on equity of 19%, with debt amounting to 139% of equity.

Post-recession, Ryland returned to profitability in 2012 and since then has reported results that are all over the map, without a clear trend.

Earnings have surprised to the downside six times in the past 12 quarters; the rest have all surprised to the upside.

The company's earnings yield is 8.80%, compared to 2.54% on the 10-year U.S. Treasury notes, and dividends yield 0.34%.

Growth estimates, combined with the dividend, imply a "fair" price of $18.72 per share, suggesting that the stock is overvalued by 89%. I've marked that price on the left-hand chart in purple.

The stock is selling for 11 times earnings but at a sharp discount to sales. It takes 71 cents in shares to control a dollar in sales.

Institutions own nearly all of Ryland's shares.

Ryland next publishes earnings on Oct. 27. The stock goes ex-dividend on Oct. 10 for a quarterly payout of 3 cents per share.

Liquidity and Volatility

RYL on averages trades 1 million shares a day and supports a wide range of option strike prices spaced a dollar apart, with open interest running to three and four figures.

The front-month at-the-money bid/ask spread on puts is 7.4%, compared to 0.8% over the most-traded symbol on the U.S. markets, the exchange-traded fund SPY.

Implied volatility stands at 31% and has been in a zig-zagging downward trend for the past three years.

The most recent rise carried volatility from 32% in May to a peak of 37% in July.

Subsequently, volatility declined and now stands in the 33rd percentile of that range, a low level that suggests long option spreads bought with a debit and expiring in an out month would have the greatest chance of success.

In the decline from July, options are pricing in confidence that 68.2% of trades will fall between $32.23 and $38.65 over the next month, for a potential gain or loss of 9.1%, and between $33.90 and $36.98 over the next week. I've marked the monthly range implied by the present trend on the right-hand chart in blue.

There is very little contract activity today.

Decision for My Account

I intend to open a bear position in RYL, structuring it as a bear put spread, bought with a debit and expiring in January. If momentum falters in the last half hour of trading, then I'll add RYL to the Watchlist as a possible trade later.

-- Tim Bovee, Portland, Oregon, Sept. 23, 2014


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.

From time to time 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 shorter-term 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.

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

No comments:

Post a Comment