I consider a bull play on UPS under all three of my rule sets.
The Chart
Elliott wave analysis places UPS in the middle portion, wave 3 {+3} of its rise from the Great Recession low of 2009.
Internally, the 3rd wave is reaching its end, as it works its way through its final wave, 5 {+2}. That 5th wave in turn is in its own middle section, wave 3 {+1}
The end of wave 3 {+3} will usher in a correction that will take back a portion of the rise from $69.66 in August 2011. That's a large movement in the price, one that makes me skittish as a trader.
Click on chart to enlarge.
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| UPS 10 years weekly bars (left), 90 days daily bars (right) |
One way to get feel for the order of magnitude is to look at how long the component subways have lasted. Wave 2 {+1} endured for only nine days.
The present wave 3 {+1}, like most 3rd waves, is likely to have a longer duration. So, arbitrarily, let's triple the 2nd wave length, which gives 27 days, or about a month. That's a reasonable estimate for wave 3 {+1}'s lifespan. Since it began on Nov. 20, that gives it about two or three more weeks to live.
There are no guarantees in Elliott, of course. A 3rd wave can run its race swiftly and, as a Mayfly wave, come to a quick end.
Wave 3 {+1} will be followed by a correction, wave 4 {+1}, to be followed by the grand finale, wave 5 {+1}.
Assume a sideways correction, which is not unusual for a 4th wave, that I'll assume has a longer duration than the 2nd wave Zig-Zag, and then a quick top-off for the 5th wave, and I get something like an additional month.
Under that rough scenario, UPS could begin its correction by mid-January.
Odds and Yields
UPS has completed 10 breakouts since wave 3 {+3} began on Aug. 9, 2011. Half were successful, on average yielding 3.8% over 44 days. The unsuccessful trades lost 2.8% over 20 days, on average.
The one bull signal to occur in wave 5 {+2} was successful, on average yielding 4.9% over 29 days.
The Company
United Parcel Service, headquartered in Sandy Springs, Georgia, is the world's largest logistics and shipment company, delivering more than 15 million packages a day in more than 220 countries and territories. Think ubiquitous and huge.
Analyst enthusiasm is pessimistic about future prospects, coming down collectively at a negative 18% enthusiasm rating.
Which is a bit odd, given that the company reports an uncannily huge return on equity of 74%, with debt running at 75% above equity.
Earnings have been profitable in all of the past 12 quarters .
Five quarters have produced upside surprises and five have surprised to the downside. The most recent of the downside surprise was the 2nd quarter of this year.
The earnings yield is 3.65%, compared to a 2.27% yield on 10-year U.S. Treasury notes. The dividend yield is 2.42% annualized at today’s prices.
The "fair" price implied by earnings growth estimates and the dividend is $68.03 per share, compared to the market price of $110.55 per share. The market premium is 763% above the implied price.
The stock is selling at 27 times earnings and also at a premium to sales. It takes $1.73 in shares to control a dollar in sales.
Institutions own 66% of shares.
UPS next publishes earnings on Jan. 29. The stock goes ex-dividend in February for a quarterly payout of 67 cents per share.
Liquidity and Volatility
UPS on average trades 3.8 million shares a day and supports a wide selection of option strike prices spaced a dollar apart, with open interest running from three to five figures.
The front-month at-the-money bid/ask spread on calls is 2.7%, compared to 0.4% on the most traded symbol on the U.S. markets, the exchange-traded fund SPY.
Implied volatility stands at 19%, compared to 14% for the S&P 500 index, and has been rising since Nov. 26. UPS's volatility is in the 41st percentile of its rise to a high of 28% attained on Oct. 15.
That level of volatility implies that the most profitable trades will be structured as long shares.
Options are pricing in confidence that 68.2% of trades will fall between $114.16 and $116.46 over the next month, for a potential gain or loss of 5.6%, and that 95% will fall between $98.01 and $122.61.
Options are trading slowly today, with calls running at 69% of their five-day average volume and puts at 57% of average.
Decision for My Account
In analyzing UPS, I've been keep in mind three possible approaches to a trade. As an innovative company, it has a place in the longer-term portfolio. Having broken past its 20-day price channel, it could play as a shorter-term play, although with a caveat.
The third possibility requires more explanation. It's Christmas season, and as always UPS's volume has been swollen by a flood of gift deliveries. That increases interest in the company, which theoretically should increase volatility, such as a pending earnings announcement would, setting up conditions for a possible volatility play anticipating a collapse in volatility.
Each strategy, however, faces a flaw in UPS that means it can't be used.
Longer term: My rules require a break above the 12-month moving average, something suggesting that it will be persistent. UPS, however, closed above MA12 and has stayed there since, indeed traveling well above the average. My rules require a close below MA12 and the a fresh breakout.
Shorter term: I require better-than-even historical odds of success to enter this sort of trade. UPS comes out even, with a 50-50 chance of a trade making or losing money. Also, Elliott wave access of the chart shows UPS ending the end of its rise. I'm always very nervous about 5th waves, and this one is no exception.
Volatility play: Love the theory, but in practice, implied volatility isn't high (which I define arbitrarily as the 60th percentile or higher of the prior upward movement). UPS stands in the 41st percentile.
Good chart, great company, but no trade today.
-- Tim Bovee, Portland, Oregon, Dec. 2, 2014
References
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.
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 decisions for his or her own account, and take responsibility for the consequences.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.
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