Wednesday's Prospects

On Tuesday, May 31:

Of 482 large-cap stocks and exchange-traded funds in my analytical universe, three had implied volatility at the 50th percentile or higher of the their annual ranges. Five more had volatility in the 40th up to just below the 50th percentile and so were within reach of meeting my criteria for further consideration.

There are no prospects for trades coinciding with earnings announcements.

I shall do further analysis on Wednesday, June 1.

The next earnings season will begin on July 11 and last for six weeks, through Aug. 19.

The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War by Robert J. Gordon

Tuesday's Agenda

I'm looking at two prospects today: An earnings play on KORS and a non-event volatility play on GDXJ. GDXJ was selected under a change to my screening process, which I described in a post on Monday.

KORS fails to meet my liquidity criterion because open interest on its options are overly low on key strike prices for calls. I require 100 contracts or higher for the open interest. The call strikes I would need are in the double digits.

So I'm laying KORS aside and turning to GDXJ, an exchange-traded fund with high implied volatility relative to its range. However, GDXJ also fails on open interest.

Two prospects -- two fails. I don't intend to do further analysis on those symbols and don't anticipate opening new positions today.

-- Tim Bovee, Portland, Oregon, May 31, 2016

The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War by Robert J. Gordon

A change in screening method

The price channel breakout method that I have used for years is no longer productive, and indeed the rest of my trading strategy has drifted so far from trading signals that the price channel breakouts have become an anomaly of sorts.

I'm trying something new this week: I shall replace the the trading signal method with a daily screening of my analytical universe, considering all symbols that meet my criteria as being candidates for further analysis.

I have updated Tuesday's Prospects post with such an analysis. Tuesday's Prospects uses both the trading signal method and the all-symbol screening method. Subsequent Prospects won't include the trading signals but rather will look at all-symbol screening and earnings announcements only.

The criteria are a price of $30 or greater, average volume of 3 million shares a day or greater, implied volatility in the 50th percentile or higher of one-year range and distance from the next earnings announcement of six weeks or more.

-- Tim Bovee, Portland, Oregon, May 24, 2016

Connectography: Mapping the Future of Global Civilization by Parag Khanna

The Week Ahead: Holiday, manufacturing, jobs

A short week punctuated at the end by a major exclamation mark.

U.S. markets are closed on Monday for the Memorial Day holiday. It is also a bank holiday in London. Markets in Tokyo and Sydney will be open.

The exclamation mark is the employment situation report, published Friday at 8:30 a.m. New York time. With the pre-eminent question impacting the markets these days being whether the Federal Open Market Committee will raise rates at the June 14-15 meeting or not, Friday's announcement takes on outsized importance.

The private-sector ADP employment report provides a sneak preview of the government report. It will be out on Wednesday at 8:15 a.m.

Other top-tier reports out during the week are personal income and outlays on Tuesday at 8:30 a.m., the Institute of Supply Management manufacturing index on Wednesday at 10 a.m. and international trade on Friday at 8:30 a.m.

Leading indicators (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, at 4:30 p.m. Thursday.

The average hourly workweek in manufacturing from the employment report at 8:30 a.m. Friday.

Manufacturers' new orders for consumer goods and materials from the factory orders report at 10 a.m. Friday.

Vendor performance, also called the deliveries times index, from the ISM manufacturing survey at 10 a.m. Wednesday.

The S&P 500 index, reported continually during market hours.

Average weekly initial claims for unemployment from the jobless claims report at 8:30 a.m. Thursday.

Manufacturers' new orders for non-defense capital goods from the factory orders report at 10 a.m. Friday.

Connectography: Mapping the Future of Global Civilization by Parag Khanna

Tuesday's Prospects

On Friday, May 27:

Of 482 large-cap stocks and exchange-traded funds in my analytical universe, 14 broke beyond their 20-day price channels, 13 to the upside and one to the downside. None survived initial screening.

As an alternative, I looked at all stocks in my analytical universe, screening them for a price of $30 or greater, average volume of 3 million shares a day or greater, implied volatility in the 50th percentile or higher of one-year range and distance from an earnings announcement. Two symbols met the criteria.

There is one prospect for a trade coinciding with an earnings announcements.

Monday, May 30, is a holiday in the United States. I shall do further analysis on Tuesday, May 31.

The next earnings season will begin on July 11 and last for six weeks, through Aug. 19.

Connectography: Mapping the Future of Global Civilization by Parag Khanna

Friday's Prospects

On Thursday, May 26:

Of 473 large-cap stocks and exchange-traded funds in my analytical universe, 11 broke beyond their 20-day price channels, 10 to the upside and one to the downside. None survived initial screening.

There are no prospects for trades coinciding with earnings announcements.

Lacking prospects, I shall do no further analysis on Friday, May 27.

The next earnings season will begin on July 11 and last for six weeks, through Aug. 19.

Sweat Equity: Inside the New Economy of Mind and Body by Jason Kelly

Earnings Prospects 5/30-6/3

Note: Edited to remove two symbols -- CTRP and MDT -- which, if they met my standards, would be prospects for the May 27 rather than the May 30. Neither has an options grid with sufficient open interest to  qualify for further analysis.

Companies continue to publish earnings at a snail's pace as we slog our way through the swamp between earnings seasons. The next earnings crunch begins July 11.

Out of 89 earnings announcements scheduled for the week of May 30 through June 3, only two meet my basic criteria for price and volume. I require that the price be $30 or higher and average volume 1 million shares a day or higher.

action	sym	earns date	am/mid/pm
5/31/2016	KORS	6/1/2016	am
6/2/2016	AVGO	6/2/2016	pm

The "action" column is the date when I will make a final decision on whether to proceed to a full analysis and possibly a trade.

Of the two, KORS  has an open interest distribution on its options grid that would make it difficult if not impossible to construct a trade. I require open interest on all legs of an options spread to be in the triple digits or more.

Moreover, neither symbol at this point has implied volatility sufficiently high on an annual basis to support my strategy of selling options for a net credit. In later stages of analysis I calculate implied volatility as a percentile of its most recent range. For today's quick-and-dirty first look I'm using the percentile of the annual range, which is provided by my trading platform.

Both the distribution of open interest on the grid and the level of implied volatility can change rapidly, so neither is disqualifying at this point, and indeed won't be until the action date.

-- Tim Bovee, Portland, Oregon, May 26, 2016

Sweat Equity: Inside the New Economy of Mind and Body by Jason Kelly

Thursday's Prospects

On Wednesday, May 25:

Of 473 large-cap stocks and exchange-traded funds in my analytical universe, 14 broke beyond their 20-day price channels, 12 to the upside and two to the downside. None survived initial screening.

There are no prospects for trades coinciding with earnings announcements.

Lacking prospects, I shall do no further analysis on Thursday, May 26.

The next earnings season will begin on July 11 and last for six weeks, through Aug. 19.

Saving Capitalism: For the Many, Not the Few by Robert B. Reich

Wednesday's Agenda

All six prospects remain below the 60th percentile in implied volatility, failing to qualify for a full analysis.

COST is closest to having sufficiently high IV, calculated as a percentile of its most recent range. My minimum requirement is the 60th percentile or higher.

A table of the prospects and their implied volatility percentiles. Note that four have IV percentiles in negative territory, meaning that volatility has dropped below the beginning of the most recent rise.

sym	range %ile
COST	51
APA	-8
BABA	3
DD	-8
NFLX	-25
NXPI	-33

COST's implied volatility now stands at 23.91%. It would qualify for analysis if it were to reach 25.02%. I shall check it during the day and do an analysis if it reaches that level. I am striking the other symbols from the prospects list. They have no realistic chance of attaining the 60th percentile.

-- Tim Bovee, Portland, Oregon, May 24, 2016

Saving Capitalism: For the Many, Not the Few by Robert B. Reich

Wednesday's Prospects

On Tuesday, May 24:

Of 473 large-cap stocks and exchange-traded funds in my analytical universe, 24 broke beyond their 20-day price channels, 23 to the upside and one to the downside.

Three symbols giving trading signals with high odds of success survived initial screening, all having broken out to the upside. High-odds symbols are candidates for directional trades.

Two symbols with trading signals having low odds of success survived initial screening, all having broken out to the upside . Low-odds symbols are candidates for non-directional trades.

There is one prospect for a trade coinciding with an earnings announcements.

I shall do further analysis on Wednesday, May 25.

The next earnings season will begin on July 11 and last for six weeks, through Aug. 19.

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

Tuesday's Agenda

The lone prospect on my desk today, INTU, was somewhat below the my minimum standard for implied volatility before the day began. After the opening bell if fell further below that level, eliminating it as a candidate for full analysis and perhaps a trade.

I measure implied volatility as a percentile of its most recent range. INTU was at the 42nd percentile last night and has fallen this morning to the 35th. My minimum requirement is the 60th.

It appears extremely unlikely that INTU's will reverse course sufficiently for a full analysis. I intend to open no new positions today.

-- Tim Bovee, Portland, Oregon, May 24, 2016

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

Tuesday's Prospects

On Monday, May 23:

Of 473 large-cap stocks and exchange-traded funds in my analytical universe, three broke beyond their 20-day price channels, two to the upside and one to the downside. None survived initial screening.

There is one prospect for a trade coinciding with an earnings announcements.

I shall do further analysis on Tuesday, May 24.

The next earnings season will begin on July 11 and last for six weeks, through Aug. 19.

Concentrated Investing by Allen C. Benello et al.

Monday's Agenda

Both prospects based on Friday's trading continue to show low implied volatility, so low that there is next to no chance that it will rise sufficiently to meet my standards for full analysis and trading.

I judge volatility according to its percentile of its most recent range.

I require the 60th percentile or higher. The two prospects come in like this: MCD in the 10th percentile and PEP in the 28th percentile.

Both are disqualified from further consideration.

-- Tim Bovee, Portland, Oregon, May 23, 2016

Concentrated Investing by Allen C. Benello et al.

The Week Ahead: GDP, homes, trade, durables

The Bureau of Economic Analysis releases a second  estimate of gross domestic product on Friday at 8:30 a.m. New York time. A significant deviation from last month's 1st estimate will be a market mover.

Three other major reports will hit the Street during the week: new home sales on Tuesday at 10 a.m.,  and international trade in goods on Wednesday and durable goods orders on Thursday, both at 8:30 a.m.

Leading indicators (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, at 4:30 p.m. Thursday.

The S&P 500 index, reported continually during market hours.

Average weekly initial claims for unemployment from the jobless claims report at 8:30 a.m. Thursday.

Index of consumer expectations from the University of Michigan Consumer Sentiment survey at 10 a.m. Friday.

Connectography: Mapping the Future of Global Civilization by Parag Khanna

Monday's Prospects

On Friday, May 20:

Of 473 large-cap stocks and exchange-traded funds in my analytical universe, eight broke beyond their 20-day price channels, three to the upside and five to the downside.

No symbols giving trading signals with high odds of success survived initial screening.

Two symbols with trading signals having low odds of success survived initial screening, both having broken out to the downside. Low-odds symbols are candidates for non-directional trades.

There are no prospects for trades coinciding with earnings announcements.

I shall do further analysis on Monday, May 23.

The next earnings season will begin on July 11 and last for six weeks, through Aug. 19.

Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business and the World by Don Tapscott

Friday's Outcomes

I rejected three prospects without full analysis because of low implied volatility: BA, BIIB and MA. I discussed the decision in this morning's Agenda post.

-- Tim Bovee, Portland, Oregon, May 20, 2016

Saving Capitalism: For the Many, Not the Few by Robert B. Reich

Friday's Agenda

In the Prospects post last night I noted one symbol, BIIB, which was a bit below the required level of implied volatility needed to qualify for full analysis and possibly a trade.

I calculated IV as a percentile of its most recent rise. I require the 60th percentile or higher. BIIB was at the 55th percentile, clearly within reach if it moved higher.

It went the other way. An hour into the trading day, BIIB it doesn't qualify for further analysis.

The other two prospects, BA and MA, remain well below the qualifying level.

A chart of symbols and their IV percentiles:

sym	range %ile
BA	28
BIIB	52
MA	3

BA and MA are to far from qualifying to have any hope, and I'm setting them aside. BIIB could well reverse. I'll check it during the day and if the IV percentile moves to the 60th percentile or higher, then I'll start the analysis.

-- Tim Bovee, Portland, Oregon, May 20, 2016

Saving Capitalism: For the Many, Not the Few by Robert B. Reich

Friday's Prospects

On Thursday, May 19:

Of 479 large-cap stocks and exchange-traded funds in my analytical universe, 14 broke beyond their 20-day price channels, all to the downside.

One symbol giving a trading signal with high odds of success survived initial screening, having broken out to the downside. High-odds symbols are candidates for directional trades.

Two symbols with trading signals having low odds of success survived initial screening, both having broken out to the downside. Low-odds symbols are candidates for non-directional trades.

There are no prospects for trades coinciding with earnings announcements.

I shall do further analysis on Friday, May 20.

The present earnings season conclude on Friday, May 20. The next earnings season will begin on July 11 and last for six weeks, through Aug. 19.

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank by John Tamny

Earnings Prospects: 5/23-27

Earnings season is over, and wow, does it ever show!

Out of 62 companies publishing earnings from May 23 to May 27,  only two made it on to my list as qualifying for consideration as earnings plays.

One reason for the slim pickings is the availability of an options series. My guideline for series selection is no less than 30 days out from expiration and no more than 60 days.

Many symbols don't have options series for July, and some also lack a series for August.

On Monday the June series will be 27 days away from expiration; the July series, 55 days; the August series, 89 days; and the September, 118 days. Only the July series qualifies at present.

Why 30 days and 60 days? It's a trade-off between premium -- my potential profit -- and time decay -- a mechanism that helps earn me that profit.

The closer to expiration a position is, the faster it time decay. I enter positions by selling option spreads for a net credit, and therefore, a faster time decay allows me to buy the positions back for less.

The farther from expiration a spread is, the larger its premium. That increases the amount I can get when selling a spread at the outset of a position.

My goal is to get as close as possible to 42 days -- six weeks. If a trade is especially attractive, I will bend the rules. But none of the disqualified symbols -- WSM, PVH and ULTA -- is worth going to that extreme.

The earnings prospects for the week to come with the day that I shall complete analysis as possible trade, the earnings publication date and the time of day, either before the opening bell (am) or after the closing bell (pm):

action	sym	earns date	am/mid/pm
5/24/2016	INTU	5/24/2016	pm
5/25/2016	COST	5/25/2016	pm

-- Tim Bovee, Portland, Oregon, May 19, 2016

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank by John Tamny

Thursday's Prospects

On Wednesday, May 18:

Of 479 large-cap stocks and exchange-traded funds in my analytical universe, 21 broke beyond their 20-day price channels, five to the upside and 16 to the downside. None survived initial screening.

There are no prospects for trades coinciding with earnings announcements.

Lacking prospects, I shall do no further analysis on Thursday, May 19.

The present earnings season will conclude on May 20. The next earnings season will begin on July 11 and last for six weeks, through Aug. 19.

Traders of the New Era Expanded Edition by Fernando and Leandro Oliveira

Wednesday's Outcomes

I opened a position in WMT timed to coincide with an earnings announcement.

I rejected CRM and DLTR without analysis because of low implied volatility relative to its most recent range, discussing the decision in today's Agenda post.

-- Tim Bovee, Portland, Oregon, May 18, 2016

Traders of the New Era Expanded Edition by Fernando and Leandro Oliveira

WMT Analysis

Updated 6/1/2016: Good old WMT, the big-box store every analyst loves to hate, the stock whose reputation is so bad that it's hard to overstate the negative vibes it emanates.

And yet, when WMT published earnings on the morning of May 19, it beat the Street estimate by 11.7%, setting me up for a nice big loss on my bear call spread. Who would have thought? 

The stock price gapped up by $6.05 and never did the pullback that often happens after a dramatic move. It kept sprinting upward, peaking $8.23 above the pre-earnings closing price and $6.38 above the profit zone.

Since then it has drifted slightly lower and may eventually pull back. The problem is, I'm so far off from my profit zone that time decay is now working against me. Time to go.

And so I did, exiting the position with these results: Shares rose by 11.3% over 14 days, or a +294% annual rate. The options position produced a 68.9% loss on debit for a -1,797% annual rate.

At entry the position had a 66.5% chance of expiring out of the money for maximum profit; at exit it had a 7.0% chance.

---

The retail chain Wal-Mart Stores Inc. (WMT), headquartered in Bentonville, Arkansas, publishes earnings on Thursday before the opening bell.

[WMT in Wikipedia]

WMT

I shall use the JUN series of options, which trades for the last time 30  days hence, on June19.

Ranges

Implied volatility stands at 29%, which is 1.9 times the VIX, a measure of volatility of the S&P 500 index. WMT’s volatility stands in the 71st percentile of its most recent range. The price used for analysis was $63.08.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	68.29	73.50	65.32
Lower	57.87	52.66	60.84
Gain/loss	±$5.21	±$10.42	±$2.24

Implied volatility 1 and 2 standard deviations; central tendency earns move

Shoe Dog: A Memoir by the Creator of Nike by Phil Knight

Wednesday's Agenda

Three of four prospects on my desk this morning continue to show overly low implied volatility, although one of them, DLTR, is close enough to meeting my standards that it might qualify during trading today.

One, WMT, meets my standard, and I shall post a full analysis today.

I measure implied volatility as a percentile of its most recent range. I require that it be in the 60th percentile or higher.

A chart of today's prospects and their implied volatility percentiles:

sym	range %ile
CRM	37
DLTR	52
WMT	72
WFC	17

-- Tim Bovee, Portland, Oregon, May 18, 2016

Traders of the New Era Expanded Edition by Fernando and Leandro Oliveira

Wednesday's Prospects

On Tuesday, May 17:

Of 479 large-cap stocks and exchange-traded funds in my analytical universe, five broke beyond their 20-day price channels, all to the downside.

One symbol with a trading signal having high odds of success survived initial screening, having broken out to the downside. High-odds symbols are candidates for directional trades.

There are three prospects for trades coinciding with earnings announcements.

I shall do further analysis on Wednesday, May 18.

The present earnings season is trailing off and will conclude on May 20. The next earnings season will begin on July 11 and last for six weeks, through Aug. 19.

Candlestick Charting Techniques by Steve Nisson

Tuesday's Outcomes

I analyzed HRL as a potential earnings play but rejected it because of difficulties with the options grid.

I considered ADI, LOW and TGT but rejected them without analysis because of low implied volatility, discussing the decision in the morning Agenda post.

-- Tim Bovee, Portland, Oregon, May 17, 2016

Candlestick Charting Techniques by Steve Nisson

HRL Analysis

The food and meat products company Hormel Foods Corp. (HRL), headquartered in Austin, Minnesota, publishes earnings on Wednesday before the opening bell.

[HRL in Wikipedia]

HRL

I shall use the JUN series of options, which trades for the last time 31 days hence, on June 18.

Ranges

Implied volatility stands at 33%, which is 2.2 times the VIX, a measure of volatility of the S&P 500 index. HRL’s volatility stands in the 71st percentile of its most recent range. The price used for analysis was $39.26.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	43.08	46.89	40.36
Lower	35.44	31.63	38.16
Gain/loss	±$3.82	±$7.63	±$1.10

Implied volatility 1 and 2 standard deviations; central tendency earns move
The Trade

HRL reached an all-time high on Feb. 16 and began a downward reversal. Whether it is a counter-trend correction or a new, longer-term downtrend is as yet unclear. Given the decades-long duration of the rise and the indisputable truth that no trend lasts forever, I'm leaning toward the new downtrend side of the question.

I'm contemplating an earnings play -- a shorter-term trade -- and so a rise is not out of the question.

After the peak HRL dropped a few dollars, moved sideways for more than a month, and then had a sharp drop from late March into mid-April before reversing back up in a retracement slightly above the 23.6% Fibonacci step.

Brokerages are extremely negative about HRL's prospects, collectively coming down with a negative 100% enthusiasm index. None of six analysts have issued a strong-buy recommendation.

Nonetheless, given the ambiguities of the chart, I shall attempt a direction neutral strategy to cover all eventualities within a defined range.

Iron condor, short the $42.50 calls and long the $45 calls,
short the $35 puts and long the $32.50 puts,
sold for a credit and expiring June 19.
Probability of expiring out-of-the-money

JUN	Strike	OTM
Upper	35	84.1%
Lower	42.5	82.6%

The premium is $0.45, which is 18% of the width of the position’s wings.

The risk/reward ratio is 4.6:1.

The zone of profit in the proposed trade covers a $3.25 move either way. The biggest immediate move after each of the past four earnings announcements was $2.94, and the average was $1.38. After eliminating the maximum and minimum post-earnings movements, the central tendency is $1.10.

Decision for My Account

The structure of the options grid severely limits choice of strike price, resulting in a large 4.6:1 risk/reward ratio. Since I limit the size of my trade based on risk, a high ratio means that there is insufficient reward to make the trade worthwhile.

So it is with HRL.

I am passing on the trade and won't be revisiting HRL prior to tomorrow's publication of earnings.

-- Tim Bovee, Portland, Oregon, May 17, 2016

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner 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. 

Alerts

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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.

Tuesday's Agenda

HRL's implied volatility moved higher and it qualifies for further analysis and perhaps a trade.

The other two prospects have overly low implied volatility, measured as a percentile of the most recent range. I require the 60th percentile or higher to pursue full analysis.

I added a fourth symbol, TGT, to the prospects list this morning after open interest of its options improved sufficiently to warrant a further look. However, it's implied volatility is also low.

The symbols and their implied volatility percentiles:

sym	range %ile
ADI	27
HRL	72
LOW	25
TGT	20

I shall proceed with a full analysis of HRL. The others are far enough out from qualifying that they won't require close watching during the trading day.

-- Tim Bovee, Portland, Oregon, May 17, 2016

Candlestick Charting Techniques by Steve Nisson

Tuesday's Prospects

On Monday, May 16:

Of 479 large-cap stocks and exchange-traded funds in my analytical universe, one broke beyond its 20-day price channels, to the upside. It failed initial screening.

There are three prospects for trades coinciding with earnings announcements.

I shall do further analysis on Tuesday, May 17.

The present earnings season is trailing off and will conclude on May 20. The next earnings season will begin on July 11 and last for six weeks, through Aug. 19.

Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future by Ashlee Vance

Monday's Agenda

Today's five prospects have implied volatility far below the minimum I require for my strategy of short-selling option spreads.

I want volatility to be at the 60th percentile or higher of its most recent range. The highest among the five is at the 35th percentile.

The symbols and their IV percentiles:

sym	range %ile
HD	35
BBT	17
DOW	5
EMN	8
GS	27

None appears likely to rise sufficiently before the closing bell to support the trade, so I anticipate doing no further analysis and opening no new positions today.

-- Tim Bovee, Portland, Oregon, May 16, 2016

Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future by Ashlee Vance

The Week Ahead: Prices, homes, industry, money policy

Prices, real estate, industry and the inside details of a money policy meeting will guide trading this week.

The consumer price index, a measure of inflation and deflation, will be published Tuesday at 8:30 a.m. New York time, as will housing starts. Industrial production  will reach traders shortly thereafter at 9:15 a.m.

Housing will take another bow with publication of the existing home sales report on Friday at 10 a.m.

Minutes of the Federal Open Market Committee meeting of April 26-27 will be released on Wednesday at 2 p.m.

Leading indicators (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, at 4:30 p.m. Thursday.

The S&P 500 index, reported continually during market hours.

Average weekly initial claims for unemployment from the jobless claims report at 8:30 a.m. Thursday.

Building permits for new private homes from housing starts at 8:30 a.m. Tuesday.

The index of leading indicators, although not itself a leading indicator, provides a useful You Are Here marker for where we are in the economic cycle. Out Thursday at 10 a.m.

Option Volatility and Pricing by Sheldon Natenberg

Monday's Prospects

On Friday, May 13:

Of 479 large-cap stocks and exchange-traded funds in my analytical universe, 21 broke beyond their 20-day price channels, one to the upside and 20 to the downside.

Three symbols giving trading signals with high odds of success survived initial screening, all having broken out to the downside. High-odds symbols are candidates for directional trades.

One symbol with trading signals having low odds of success survived initial screening, having broken out to the downside. Low-odds symbols are candidates for non-directional trades.

There is one prospect for a trade coinciding with earnings announcements.

I shall do further analysis on Monday, May 16.

The present earnings season is trailing off and will conclude on May 20. The next earnings season will begin on July 11 and last for six weeks, through Aug. 19.

Option Volatility and Pricing by Sheldon Natenberg

Friday's Outcomes

I entered a new position on MON.

I analyzed CI and attempted to open a position but was unable to get a fill.

-- Tim Bovee, Portland, Oregon, May 13, 2016

Grit: The Power of Passion and Perseverance by Angela Duckworth

CI Analysis

The health-services company Cigna Corp. (CI), headquartered in Bloomfield, Connecticut with a portfolio of products ranging from medical and dental insurance to the tools and products needed to provide care of patients, closed below its 20-day price channel on Thursday, sending a bear signal. The stock has an historical tendency to whipsaw.

[CI in Wikipedia]

CI

I shall use the JUN series of options, which trades for the last time 35 days hence, on June 18.

Ranges

Implied volatility stands at 28%, which is double the VIX, a measure of volatility of the S&P 500 index. CI’s volatility stands in the 55th percentile of its most recent range. The price used for analysis was $127.05.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	138.19	148.33	N/A
Lower	115.91	104.77	N/A
Gain/loss	±$11.14	±$22.28	N/A

Implied volatility 1 and 2 standard deviations; central tendency earns move

Grit: The Power of Passion and Perseverance by Angela Duckworth

MON Analysis

Update 6/9/2016: The chance for a big profit on MON disappeared in mid-May with the announcement that the German multinational Bayer AG was in negotiations for a possible purchase of Monsanto Co. Shares gapped up at the opening by 6.8%. 

Even earlier rumors were flying Two trading days before the announcement the price had gapped up 5.4%, and five trading days before that, 11.1%. 

So the only question I faced with MON was whether to take a large loss or wait in hopes of a small profit. I bided my time and today cashed out.

Of course the beauty of trading options is that even a small profit gives a rate of return that stock traders and fixed-income investors can only envy.

Shares rose by 10.1% over 27 days, or a +136% annual rate. The options position produced a 4.0% yield on debit for a +54% annual rate.

I exited at 4% of my potential maximum profit -- my goal is always 50% or better. The odds of expiring out of the money for maximum profit were 57.6%, high enough that I could have justified waiting further if I had wanted. I chose to play it safe.

---

The agricultural products company Monsanto Co. (MON), a leader in genetically modified foods headquartered in St. Louis, Missouri, closed above its 20-day price channel on Thursday, sending a bear signal. The stock price has low historical odds that it will follow through on a trading signal, making prone to whipsaws.

[MON in Wikipedia]

MON

I shall use the JUN series of options, which trades for the last time 35 days hence, on June 18.

Ranges

Implied volatility stands at 38%, which is 2.6 times the VIX, a measure of volatility of the S&P 500 index. MON’s volatility stands in the 75th percentile of its most recent range. The price used for analysis was $98.31.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	109.95	121.60	N/A
Lower	86.67	75.02	N/A
Gain/loss	±$11.64	±$23.29	N/A

Implied volatility 1 and 2 standard deviations; central tendency earns move

Grit: The Power of Passion and Perseverance by Angela Duckworth

Friday's Agenda

Happy days are here again. I feel as though a long drought is ending.

Today, for the first time in a long time, both prospects have implied volatility high enough to qualify for a trade, MON in the 75th percentile and CI in the 57th.

I shall post analyses later today.

-- Tim Bovee, Portland, Oregon, May 13, 2016

Grit: The Power of Passion and Perseverance by Angela Duckworth

Friday's Prospects

On Thursday, May 12:

Of 476 large-cap stocks and exchange-traded funds in my analytical universe, 10 broke beyond their 20-day price channels, seven to the upside and three to the downside.

No symbols giving trading signals with high odds of success survived initial screening.

Two symbols with trading signals having low odds of success survived initial screening, one having broken out in either direction. Low-odds symbols are candidates for non-directional trades.

There are no prospects for trades coinciding with earnings announcements.

I shall do further analysis on Friday, May 13.

The present earnings season is trailing off and will conclude on May 20. The next earnings season will begin on July 11 and last for six weeks, through Aug. 19.

Odds On: The Making of an Evidence-Based Investor by Matt Hall

Earnings Prospects: 5/16-20

Fifteen potential earnings plays have made it past initial screening, qualifying for further analysis next week, May 16 through May 20.

Here is the list:

action	sym	earns date	am/mid/pm
5/16/2016	A	5/16/2016	pm
5/16/2016	HD	5/17/2016	am
5/16/2016	TJX	5/17/2016	am
5/17/2016	ADI	5/18/2016	am
5/17/2016	HRL	5/18/2016	am
5/17/2016	LOW	5/18/2016	am
5/17/2016	TGT	5/18/2016	am
5/18/2016	CRM	5/18/2016	pm
5/18/2016	LB	5/18/2016	pm
5/18/2016	DKS	5/19/2016	am
5/18/2016	DLTR	5/19/2016	am
5/18/2016	WMT	5/19/2016	am
5/19/2016	ROST	5/19/2016	pm
5/19/2016	DE	5/20/2016	am
5/19/2016	FL	5/20/2016	am

I've loosened the criteria a bit, now that earnings season is limping to a close, by lowering the minimum average volume requirement from 3 million shares a day to 1 million. My best guess is that this will simply result in more symbols that failure final screening on action day -- the day I would place a trade -- but I never know for sure until I look.

-- Tim Bovee, Portland, Oregon, May 12, 2016

Odds On: The Making of an Evidence-Based Investor by Matt Hall