MENT: Computer design gear

Some people use computers. The more technically advanced build computers. The hard-core techsters design computers. And behind them stand the people who make the machines that the designers use.

Mentor Graphics Corp. (MENT) stands within that last category. And the company's machines get a workout, designing printed circuit boards, integrated circuits, field programmable gate arrays, embedded software solutions, wire harness systems, and computers.


MENT is headquartered in Wilsonville, Oregon, a bit south of Portland, on the fringes of the Silicon Forest.


MENT had the most bullish chart of 18 stocks added today to Zacks' strong-buy list. (See my essay "10,000 Charts" for a description of my screening methods.)


The price had a steep fall off in late February 2011, dropping from $16.56 down to $8.50 in early August 2011. Since then it has retraced nearly 80% of the decline, hitting a higher high today of $14.84 (so far).

However, MENT is not a blue-sky stock, and it faces resistance from any money that was left behind by the price decline. That money may well be looking to get out once it sees a break-even point, and that will tend to slow MENT's rise unless it is propelled higher by earnings surprises and other new information.

The return on equity, at 10%, is more in the slow-and-steady range, and MENT carries some long-term debt, producing a debt/equity ratio of 0.27. That's not a crippling level, but always, the lower the debt the better I like the stock.

Institutions love MENT. They hold 96% of the shares and have helped bid up the price/sales ratio. It takes $1.57 in stock to control $1 in sales.

MENT is moderately liquid, trading 686,000 shares a day on average. It has a good options inventory for such low volume -- 10 strike prices, and a reasonable bid/ask spread. 

However, the open interest is extremely low. Only two strike prices have open interest, and in both cases, there are fewer than 60 contracts.

Implied volatility, at 67%, is on the high side objectively but low historically for MENT. During much of the present leg up, MENT has had volatility around 100%. 

That level of volatility suggestions the best positions are short -- sold for net credit. But the open interest on options is too low for me to construct such a position. 

One way out of the dilemma would be to buy shares, and then sell covered calls, which provides a 4.4% six-week return for the March near out-of-the money call, equivalent to a price rise to $15.47.

MENT announces earnings after the Feb. 23 close. 

Decision for my account: I bought shares of MENT. I'll keep an eye on it and sell covered calls when I get a better sense of how high it might go before pausing.

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

FAST: Nuts and bolts

Fastenal Co. (FAST) sells industrial and construction supplies, both retail and wholesale. It includes everything from nuts and bolts to hydraulics and welding supplies.

The Winona, Minnesota company has 2,490 stores in 10 countries stretching from North America to East Asia and western Europe.

FAST had the most bullish chart of 16 selected at random from 675 large-cap stocks. (See my essay "10,000 Charts" for a description of how I screen.)

The price has closely mirrored the general market, hitting a $12.94 recession low in March 2009, and then beginning a long march upward to an all-time high of $48.08, set today. In fact, a broader look at the chart shows that FAST has trended upward, with only two major corrections, since it was first traded in 1992.

That shows the power of selling the supplies that people need to do work. A screwdriver and wrench last a long time. Screws, nuts and bolts need to be bought over and over again.

The bad side of the chart is the volume, which reached a near-term peak on Jan. 18 but has declined steadily since then as the price continued to rise. In my book, that shows declining interest in the stock, of the sort that often precedes a fall.

Although the analyst consensus on FAST rates it as a buy, there has been a drop off in bullish sentiment of late.

FAST has a return on equity of 26% -- well into growth-stock territory -- and no long-term debt.

Institutions own 86% of the stock, and the price has been bid up to quite an expensive level. It takes $5 in stock to gain control of $1 in sales. That's about the same as Google price/sales ratio.

FAST is a liquid stock, with average volume of 1.9 million shares. The options selection is a bit limited -- only nine strike prices for March, but the bid/ask spread is quite reasonable. The strikes near the money have three- and four-figure open interest.

Implied volatility is 31%, a low for the past six months, and has been trending downward since last November 2011. I would structure my position as one paying a net credit, basically selling the current volatility in the expectation of buying back a lower volatility.

Next earnings are scheduled for April 11. The company has a quarterly payout worth 1.42% a year, with the next ex-dividend date expected in late April.

Decision for my account: I've opened a bull put spread for March expiration, short the $45 strike and long the $40. The blue-sky chart and excellent financials trumped the declining volume and high price/sales ratio.

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

FB: Friending the Financials

Facebook Inc (FB) sometime in the next few months will go public. (The FB symbol hasn't been approved yet by the Securities and Exchange Commission.)

Like new-born baby, FB has no history, no chart -- nothing that a technical analyst can hang a hat on.

But it does have a financial history, courtesy of the Statement of Registration filed with the SEC.

FB is proposing to issue up to $5 billion in shares split into Class A and Class B. Class A has one vote per share, and Class B has 10 votes. The company used both classes in calculating its earnings per share for 2011.

FB is proposing to issue something like 1.9 billion shares of both classes.

Revenues (sales) for 2011 totaled $3.7 billion, and on that the company had net earnings of $1 billion. Shareholders equity was $4.9 billion.

Revenues and net income have grown like gangbusters beginning in 2009, as has the customer base. The numbers show FB to be what we all knew it was: A tech start-up that took off and is now rocketing toward the heights. Call it Google II. Or Microsoft the Sequel, for those who remember the ancient days.

I use a very simple analysis to understand the fundamentals of stocks. Raw numbers are the books lack context. So I make heavy use of ratios to make the numbers my friends.

I look at return on equity, as a measure of the management's efficiency. How much profit did they produce off of shareholders' portion in the company?

FB in 2011 had a return on equity of 20.4%. Anything from 20% up is potentially a growth stock in my book.

I look at the debt/equity. If a company has had to go deeply in debt over the long-term to achieve its results, then it's not really earning entirely from its own operations. Long-term debt can be a good thing if it increasing earning capacity. But whether good or bad for business, high debt levels mean impaired capacity to meet downturns and other emergencies.

FB has no long-term debt. Zero. So the combination of no debt and a high return on equity means FB is growth stock, the way I look at companies.

The third item I look at is the price/sales ratio, which tells me how much it costs to buy $1 in sales (revenues) .

Since we have no price for FB -- the brokerages underwriting the initial public offering will set an opening price shortly before trading begins. So to get a price/sales ratio, we need to work backward, estimating a ratio and see what price it would take to produce it.

Google (GOOG) is probably a good comparison with FB. True, GOOG is well beyond its IPO back in August 2004. But it is one of the few companies around that matches FB for reach and -- how to phrase it? -- entanglement in people's daily lives.

GOOG's opening price was $100 a share -- it closed Thursday at $585.11. It's present price/sales ratio is 4.98, meaning the price is 4.98 times sales per share.

Applying that FB's revenue per share -- $1.98 -- I get an imputed price of $9.85 per share. That seems awfully low, so lets try something else. GOOG's price/earnings ratio is 10.15, so aplying that to FB's earnings per share, and we get an estimated price of $10.15.

Well, $10 is clearly a ridiculously low price with nothing to do with what will actually happen when trading opens on FB. Personally, I suspect it will much more.

But there is something to think about here: If FB is priced above $10.15, then it is being valued at a higher price than GOOG commands today.

Try again: Apple's (AAPL) price/sales is 3.33, and its price/earnings is 12.99 -- both less than GOOG's. So anything above $10.15 a share for FB would be more expensive compared to sales and earnings than AAPL's current price of $455.12.

Long awaited IPOs have a tendency to run amok in irrational exuberance, and then to fall. GOOG was an exception to that observation. FB might be as well.

But, remember Red Hat (RHT)? It rocketed up for five months after opening at $23, reaching at its peak $151. Then it fell, and 10 months later was selling for $2.40. It now goes for $47 a share. That also might be FB's future.

Without a history on the chart, with only the fundamentals and the pricing as my guide, there's no way to tell which track FB will follow. I intend to wait before opening any position on FB's stock.

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

M: Battered consumers limp back?

Macy's Inc (M) has been on a roll since last August, and the analysts are at last starting to like what they see.

Retailing was hit so hard by the recession, it's hard to believe that battered consumers might in fact be limping back. If M's stock price is a leading indicator, then the answer is "Yes".

Macy's hit rock bottom in November 2008 at $5.07, and has zig-zagged itself up ever since. The most recent zig has carried the price from $22.66 in August 2011 to $35.92 on Jan. 19. Since then, the stock has fallen in a five-trading day correction, and then resumed its rise.

M had the second-best chart of 19 added to Zacks top buys on Wednesday. I wrote about Wednesday's top pick, Seagate, earlier today. Thursday's top pick was Olympic Steel Inc. (ZEUS), but it has average volume of 53,000 shares with a chart retracing upward within a broader downtrend, and that means there is precisely zero chance that I would consider opening a bull position.

M is within a longer-term uptrend, and it has the advantage of liquidity, which means a good options selection, which means I can still open a bull position if so minded and hedge against declines. Highly liquid stocks give me so many fine choices when it comes managing a position.

For M, a break above $35.92 would signal the rise was indeed continuing. That level is 2.1% away.

M has a 22% return on equity, and a debt/equity ratio of 1.19. The debt is way too high for my idea of a growth stock, but the return on equity is excellent.

Institutions love M -- they own 91% of the stock -- and M is on sale, with 55 cents worth of stock buying a dollar in sales.

A mentioned liquidity -- 7.2 million shares on average. There is a full selection of options, with mainly three-figure open interest but some with four figures.

Implied volatility is on the lowish side, at 34%, and is in a downtrend. I would look to open a position for net credit, selling the current volatility in the expectation of buying it back at a lower level.

A cautious trader will wait for a break above $35.92, signalling the uptrend is indeed continuing.

Decision for my account: I've opened a March bull put spread, short the $24 strike and long the $19 strike.

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

GMCR: Hot coffee

Green Mountain Coffee Roasters Inc. (GMCR), which roasts Arabica beans and packages in them in ways that are easy to brew for use in offices and other institutional settings. But also in the home.

It was once the wonder child of bull plays, rising from $5.19 in mid-November 2008 to a high of $115.98 in late September 2011.

Then came the fall, down to a low of $34.06 in mid-November 2011, followed by a mild recovery.

And then came Wednesday's earnings surprise -- GMCR beat the Street estimate by a stunning 64% -- and the stock took a victory lap by gapping up by around 20%.

Whenever an event of that magnitude happens on a chart, perspective is everything.

The rise does put GMCR in an uptrend, setting a higher high following a higher low within the frame of a bounce back from the decline from the absolute peak.

But the price remains well below that peak, and it remains a retracement of a decline -- a correction of a correction -- rather than a resumption of the uptrend that made GMCR so popular among traders.

To resume the major uptrend, GMCR would have to break above $115.98, and that level is a long ways away.

Given the decline, analysts peg GMCR as a sell. However, they have as yet to respond to the earnings surprise. So that might well change. It's all a question of the details tucked within the quarterly financial statement.

Despite the decline, GMCR remains within growth-stock territory, with a return on equity of 20% and a debt/equity ratio of 0.24. The institutional investors are still playing, with 73% ownership of the stock, and the price is high -- it takes $4.09 to control $1 in sales.

With average volume of 5.2 million shares, GMCR is liquid and has a full selection of options with four-figure open interest and very narrow bid/ask spreads.

Implied volatility, although it plummeted with the price gap, is still quite high, at 62%. (Compare that with the S&P500's 18% volatility.) If I opened a position, I would want it to be for a net credit, so I'm selling volatility high when I open and buying it low when I close.

Next earnings are three months away -- not a factor in the decision.

My problem with GMCR is the gap. At 20%, a lot of people will be looking to take some profits. And I suspect that there is still some money in the stock from last autumn that is looking for a good excuse to cut losses and get out. That could limit any further price rise.

In a case like this, I want to wait and see. A bounce down from the $70 level would make a decent iron condor with a $40 floor. Iron condors profit from sideways moves. A break above $72.27 -- the next level of upside resistance -- would turn it into an attractive directional bull play.

Decision for my account: I'm passing on GMCR for now. I'll revisit it next week, looking for a continuation of the price rise or a bounce down from $70.

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

STX: A hard-driving earnings surprise.

Odds are good that you have a product made by Seagate Technology PLC (STX) spinning busily in your computer.

STX makes hard drives, and their business has improved so much that on Tuesday they beat the Street estimate of earnings by 22%. The price gapped up on Wednesday, and since then has ticked up bit more today to set a higher high.

The PC business took a dive during the recession -- replacing computers wasn't a high priority for companies struggling to survive. So it makes sense that as the economy recovers, STX's business will as well.

There is some pressure on companies to upgrade, simply to keep up with current needs. Anyone using a Windows XP machine (like me) is two generations behind, and it's starting to show with the appearance of applications that won't run on an operating system that old.

On the other hand, hard drives have turned almost entirely into commodities. No one really thinks about the hard-drive brand anymore. And with the growth of cloud computing, hard drives are starting to look a bit like buggy whips after Ford started selling his Model T, at least atop the lap, if not yet the desk.

STX had the most bullish of 19 stocks added on Wednesday to Zacks' top buy list. See my essay "10,000 Charts" for a description of my screening methods.

Today's high -- $26.31 (so far) -- brings STX above the 2008 period of congestion before the recession collapse of the price. The next resistance level is $28.91, set in late October 2007.

The stock's highest high is $31.35, set in October 2003. So the price is within reach of blue-sky territory.

STX has an attractive return on equity of 29% with a fairly high debt/equity ratio of 0.84. Institutional ownership is 81%, and the price is low -- 93 cents of stock will buy control of a dollar in sales.

The stock is extremely liquid, with average volume of 19.7 million shares, and has a full selection of options, five-figure open interest and very narrow bid/ask spreads.

The implied volatility is at historic lows -- 43%, compared to 58% in late January and 85% last October. Yet the volatility is high compared to the S&P 500, which is at 18%. So STX has plenty of room to go lower, and that inclines me toward a short position, under the rule, Sell high buy low.

Next earnings are three months away. STX pays a 3.9% dividend and goes ex-dividend on Feb. 13.

Decision for my account: I've opened March expiration bull put spreads on STX, selling the $24 strike and buying the $19 strike.

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

AMZN: Thinking sideways

When Amazon.com Inc. (AMZN) missed its earnings estimates after the close Tuesday, it gapped down by 10.6%, from $194.44 to $173.81.

It is up in intra-day trading but remains within a level of trading congestion set from mid-December 2011 to mid-January 2012. 

Bottom line: AMZN most likely is going to stay put for awhile. After a move of that magnitude, there's little incentive for traders to move the price a huge distance in either direction.

Enter the short iron condor.

The iron condor is an options construction composed of a bear call spread and a bull put spread, both on the same stock with the same expiration. It remains profitable within a range. If it moves above or below that range, then it becomes loss-making.

Because the iron condor is short -- there's a net credit when I open the position -- a trader typically goes for the closest expiration in the hope of keeping the premium, which is the maximum profit

The next expiration is Feb. 17, about three trading weeks away.

Looking at the chart, the previous high, before the earnings miss, was about $195, and the low before that  was about $165, although all the other lows of the congestion period were above $170.

So I want my iron condor to be profitable between those levels, and then to trail off gradually above and below them.

Here's the construction, from options expiring in February:

• Bear call spread: Sell the $195 strike call, buy the $205 call.
• Bull put spread: Sell the $170 strike put, buy the $160 put.

Like any position, an iron condor must be watched, and either exited or assured as the price hits the boundaries of profitability -- below $170 and above $195 in this case.

Beyond AMZN, the iron condor is a way to play large gaps, which are listed daily on many brokerage platforms. The asumption is  that after a gap, the stock will remain within a range -- out of shock, perhaps? I prize liquidity, so it's a play I use only on high-volume stocks.

Decision for my account: A short time ago I opened the iron condor described above.

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

ECL: The Alchemy of Bugs and Grime

Ecolab Inc. (ECL) -- from its name one imagines white-robed scientists delving into the secrets of environmental sustainability and climate moderation. But that's not what the St. Paul, Minnesota company does. Ecolab kills bugs and removes grime.

ECL provides its basic, gotta-have-it services for hospitality, food service, health care and industrial enterprises across the world. It keeps the floors and other surfaces squeaky clean and cockroach free.

No, ECL won't roll back global warming. But it will keep the health inspectors happy as the climate degrades.

ECL had the most bullish chart out of 16 selected at random from 675 large-cap stocks. I describe my screening methods in an essay, "10,000 Charts".

The price suffered a nasty plunge in early August 2011, and from that low of $43.81, has climbed steadily to its high of $61.42 on Jan. 26. Since October 2011 the stock has been trading in blue-sky territory, above all prior prices.

The company has clearly discovered the alchemy of turning grime and cockroaches into gold. I's return on equity is a stunning 23%, debt to equity is on the low side at 0.42, and the institutions love it, owning 78% of the stock and bidding up the price to 2.78 times sales.

Earnings, however, are unstable -- they rise for a few quarters and then fall, and then rinse and repeat. So I conclude that it is a stock better played for the anticipation of earnings rather than for riding it through the announcement and risking an earnings surprise.

Understandably, analysts are on the whole neutral about ECL. They don't see it outperforming the market to any great degree.

The next earnings announcement is Feb. 28 before the open. So the question of whether to trade now comes down to short-term considerations -- how much bump can I get in before exiting the position ahead of earnings.

The hourly chart shows that ECL, after hitting its high of $61.42 on Jan. 26, set a low at $59.55 on Jan. 30, a lower high of $60.79 on Jan. 31, fell to a higher low, and then gapped up to a high of $61.15 today at 10 a.m. Eastern.

That final high, today, is the crux of the problem. It is a lower high compared to Jan. 26, but a higher high compared to Jan. 31. In the subsequent three hours, the price has dropped to fill in the gap, which in classic analysis would indicate a likelihood that the price would reverse and resume its rise.

If I were to play ECL, I would want to see that Jan. 31 high taken out, and even better, the Jan. 26 high. After getting in I would want to see a strong price rise prior to the earnings announcement. If I had some equity behind me at earnings, I might ride it through. If not, then I would exit a couple of days before.

ECL has a moderately OK selection of options -- 10 strikes, with triple-figure open interest on the February at-the-money call. The bid/ask spread is quite reasonable. The implied volatility is way low, at 22%.

Because of the low volatility, I would play it as long calls with as much delta -- price change on the option vs. the stock -- as I could decently purchase.

Decision for my account: I won't buy ECL now. I'll consider a purchase once it clears above $61.42.

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

BDC: Cable guys

Belden Inc. (BDC) of St. Louis, Missouri makes cables and related products for networking. Everyone is either building a network or expanding their present network, so it's stock with a good story.

The chart is less than awesome. It began its present rise in early October 2011, at $23.24, peaking lat Friday, Jan. 27, at $40.45. The rise was interrupted by a lengthy sideways contraction that lasted all of autumn and into winter.

BDC was the most bullish chart among 31 stocks added to Zacks top buys today. The Zacks method is based primarily on analyst opinion. See my essay "10,000 Charts" for a description of my chart screening process.

Longer term, BDC is a stock that has gone nowhere for more than 15 years, zigging and zagging between around $60 to around $10. There's a lot of money to be made in zags and zigs of that magnitude -- don't get me wrong. But BDC is not a shoot-for-the-moon play.

The price is at a resistance level, set in February 2011 and needs to beat $40.41 to count as a breakout. Beyond that there is resistance at $42.97 set in June 2008, and once that is past, it is clear sailing up to the July 2007 peak of $60.

The financials, by contarst, look pretty good. The return on equity is 15%, and the debt equity ratio is 0.78 -- higher than I like but not awful.

Institutional ownership is listed as 103%. I'm not sure how that's possible, but it means that the big players love Belden. And the price is reasonably cheap. It takes only 94 cents in stock to buy $1 worth of sales.

Belden is a moderately liquid stock, with average volume of 220,000 shares a day. That, however, has not translated into a great selection of options. There are only eight February strike prices available, and the most open interest on any strike is 16 contracts. The bid/ask spread is abysmal: $2.90/$6.80 for the at the money February call, for example.

BDC announces earnings before the open on Feb. 9. The company pays a small dividend, yielding 0.51% annually, with the next ex-dividend date due sometime in March.

Decision for my account: I would consider a bull play upon a decisive breakout above the $40.41 level, and even more on a breakout above $42.97. But I would want to see some movement before committing my funds. The lack of decent options is a barrier, because it makes it impossible to enjoy the leverage that options provide. So even with a breakout, the options situation might well be a deal-killer.

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

PAA: Nice chart, but few big players

Plains All American Pipeline L.P. (PAA) of Houston, Texas manages crude oil and natural gas -- liquified and otherwise -- from where it was got to where it is useful, with all that such an operation implies: Transportation, storage, terminalling, marketing, refining. There's a lot going on with this company. To top it off, the company has been on an aquistion tear the past couple of years.

PAA was the most bullish chart of 16 selected at random from 675 large-cap companies. I describe my screening methods in an essay, "10,000 Charts".

The company's stock has been on the rise since early October 2011, with two corrections, carrying the price from $54.90 to $77.86. The most recent leg up began Jan. 13 at $72.57.

The story for an energy company like PAA is elementary: The economy is recovering, expanding industries need more fossil-fuel energy, and PAA can provide it.

The chart hit blue-sky territory in December 2011, and since then has traded above all previous price levels.

So, good chart -- good story. and pretty good financials: The return on equity is 14%, and earnings have been on the rise from the third quarter of 2010.

Yet the price is dirt cheap -- 37 cents will buy $1 worth of sales, and the institutions are staying way. They own only 35% of the stock. And the company pays a relatively high dividend, yielding 5.29% at present. (Under the Warren Buffet theory of investing, retained dividends suggest a stronger company, and PAA is giving the money back to shareholders rather than using it to increase value.)

All of which is a great big caution sign for me. If the big guys aren't crazy about PAA, given its fine chart, then maybe I shouldn't be so crazy about it, either. They might -- whisper it -- actually know more than I do.

The company is liquid, trading on average 458,000 shares a day. The ex-dividend date is Wednesday, Feb. 1, and earnings will be announced Feb. 8 after the close.

The stock has a fine selection of options, with some strikes having four-figure open interest and all having reasonable bid/ask spreads. Implied volatility has been in the lower 20% or upper 10% range since mid-December 2011, suggesting the position is best played as long options or as shares.

Decision for my account: If earnings weren't so close, then I would open a bull position. Even with earnings close, if the warning flags weren't so obvious, then I would open a position. But the combination of earnings just around the corner and the warning flags -- low price to sales, low institutional ownership, high dividend -- make me take pause. So, no trade today. I'll take another look on Feb. 9.

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

EQIX: Future memes

Equinix Inc. (EQIX), from its headquarters in Foster City, California, south of San Francisco, runs data centers to serve its 35 markets in the United States and Europe.

It plays into the future memes of our time: Cloud computing, global integration, customer experience. It provides the robust bones and sinews that give strength to early 21st century enterprise.

Given the forward nature of its business, I find it amusing that its chart maps nicely to that of almost any sort of enterprise -- new tech or old -- that went through the recent recession -- a decline from 2008 into a major low in 2009, and a strong recovery thereafter, although one marked by stumbles.

What makes the EQIX chart stand out today is that last week, on Jan. 26, it moved above its pre-recession  high for the first time, hitting $121.75. In the ensuing two days of trading, the price has pulled back, but it is positioned for a breakout, and that makes it worth a closer look.

EQIX had the best chart, in my judgment,  of 16 stocks picked at random from a pool of 675 large capitalization companies.  (See my essay "10,000 Charts" for a discussion of how I screen stocks.)

The price began its most recent upswing on Oct. 4, 2011 at $82.43, a rise that picked up serious momentum beginning Jan. 5 from $100.47.

For the momentum trader, the question is whether the price will push decisively past its $121.75 high into a further upswing. No one knows, but the fact that the stock is trading, for a third day, within the range of the breakout day suggests there is powerful sentiment for the bullish case.

Analyst opinion, on average, views EQIX as a strong buy. The financials, however, don't paint EQIX as a growth stock. The return on equity is only 4%, and debt-to-equity is high, at 1.51.

And it's expensive. It takes $3.77 in stock to buy $1 in sales -- no surprise, with institutinoal ownership at 97%.

So for the trader, EQIX lacks subtlety. This is no stealthy play. EQIX stands up and shouts, "Hey, I'm a hot stock. Buy now! Look what I've already!"

The stock has average volume of 1.2 million shares, and the options selection is quite good, running from $55 to $140 for the February expiration, mainly at $5 intervals. Open interest runs as high as 3,000-plus.

The trader's question is this: Since EQIX is so obviously hot, has everyone already gotten on board? Is there more money waiting to come on board and drive the price higher?

The most recent rise was on increasing volume, suggesting that there is still buying interest.

Implied volatility is somewhat high, standing at 51%, up from 38% on Jan. 6, when the present rise began. High volatility is generally something I like to sell -- through short options positions for a net credit.

Decision for my account: I've opened a February bull put spread, short the $115 strike and long the $110 strike, for a net credit.

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

FBMI: Community Banker

Firstbank Corp. (FBMI) headquartered in Alma, Mich. -- north of Lansing in the middle of nowhere -- had the second best chart of the 17 stocks newly added to Zacks top buys list.

The very best chart was Apple Inc. (AAPL), but since AAPL gets written about all the time everywhere by everyone, I've decided to go with #2 for my write-up rather than add to the Applish punditry.

(See my essay "10,000 Charts" for a discussion of how I select stocks.)

FBMI is no Apple. It has an average volume of 6,023 shares a day compared to Apple's 14.4 million. A share of FBMI costs $6. Each share of Apple sells for more than $450. FBMI runs seven small banking subsidiaries, all in Michigan. Apple is a powerhouse of technical innovation that spans the globe and no doubt looks forward to an iPad 4 accompanying astronauts to Newt Gingrich's colony on the Moon.

To see them both on the same top picks list is a little shocking, even more to see them with competing for top chart.

FBMI is not a jump-out-obvious pick for a bull play. Like all banking companies, its stock suffered greatly from the collapse of global finance. After hitting bottom in 2010 at $3.98, it remains far below the $22 range it saw during the good old days before the crash.

AAPL -- a much more obvious chart even if the trader knew nothing else about the company -- also saw a sharp recession decline, bottoming in 2009, but it has since pushed ever upward to new heights.

I like FBMI's chart precisely because it is in the early days of its recovery. Any dollar that could be invested in AAPL is already invested. FBMI is still a bit stealthy.

From its low, FBMI's stock has set a high, and a lower low, and is on the way back up, on volume, as it challenges resistance set last July. Once it soaks up that money, there will be no resistance until the prior high at $7.51, set in early March 2011. Any move above that level marks a higher high and therefore establishes an uptrend.

FBMI stresses local control and community lending by its banks. That puts it at the forefront of the economic recovery, if in fact the economy is recovering. (I judge that it is, but there are many naysayers about.)

The financials are nothing to cheer about -- return on equity is 3%, debt to equity is 0.53 (a bit high, but that's common for banks), and price to sales is 0.72. Price/earnings is 11.73 -- not high at all.

Earnings have been accelerating the last new quarter -- 15 cents in the 3rd quarter of 2011 and 22 cents the 4th quarter, and revenue has increased in each of the last four quarters.

Amazingly, FBMI does have some institutional owners, who hold 17% of shares.

So, for me, this is a different sort of play. It's not a momentum stock, except in the narrowest of senses. It's more of a value play, perhaps -- buy low and wait for the high?

The King of Value, Warren Buffet, would hate FBMI because it is small, illiquid and unknown outside of its narrow region. Yet arguably, it will be such small community banks that power the better known brands as better times return, be it manufacturing start ups or the new restaurant in town that everybody loves.

FBMI has no stock options. It is shares or nothing. For a practical trading, it's the sort of stock that I would buy and stick in the corner of my trader's hope chest, and I would pull it out once a year to see how it's doing.

Decision for my account: I'm not opening a position in FBMI because it is tied to such a narrow geographical region, and moreover, one that is prone to industrial collapse. Moreover, although Michigan is smart state with a lot of talent and manufacturing wisdom, I'm not convinced that manufacturing is in fact the American future. A community bank in a community that looks to the past has a dismal future.

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

The Week Ahead: Jobs

This is jobs week in Econoland, a week filled with sneak previews of the employment and unemployment report, to be released on Friday.

An economist of my acquaintance, back when I wrote about the Michigan economy as a young wire-service reporter, always greeted my phone calls for comment on employment with finger-tapping impatience.

It's a trailing indicator! -- he would say -- It tells where we've been, not where we're going, so it's not interesting.

And he was quite right. Unemployment -- a layoff or a failure to find work -- or employment -- the creation of a job -- are both driven by events far in the past. They're the end game of the process, not the cause.

Past sometimes is prologue, but not always. So the smart economist -- and the smart trader -- will be looking at indicators upstream from jobs as a guide to the future.

Even so, the unemployment and employment figures will motivate a large number of traders during the week, a fact that, however unreasonable, must be taken into account.

On Monday, the week kicks off at 8:30 a.m. Eastern with personal income and outlays, and from those are derived the savings rate.

Tuesday starts the jobs theme with the employment cost index at 8:30 a.m. That is followed by the S&P Case-Shiller home price index in 20 metro areas at 9 a.m., the Chicago purchasing managers index at 9:45 a.m. and consumer confidence at 10 a.m.

More jobs on Wednesday, with the Challenger job-cut report at 7:30 a.m. and the ADP employment report at 8:15 a.m. ADP gets its data from the payrolls it handles. Also, motor vehicle sales throughout the  day, construction spending and the Institute of Supply Managements manufacturing index at 10 a.m., and petroleum inventories at 10:30 a.m.

And yet more jobs on Thursday, with the jobless claims report at 8:30 a.m. Also out, productivity and costs, also at 8:30.

And finally, Friday comes, and the Labor Department releases the real deal: The employment situation report at 8:30 a.m. Also out on Friday, factory orders and the ISM's non-manufacturing index, both at 10 a.m.

Dallas Fed Pres. Richard Fisher is the lone Fedster speaking during the week, at 7:15 p.m. on Thursday. He stood among three Federal Open Market Committee members who voted last summer against expanding the money supply further to encourage economic growth.

Fisher took office under President George W. Bush. His resume shows institutional ties to former Secretary of State Henry Kissinger’s strategic advisory firm, the private bank Brown Brothers Harriman Inc., and his own money management firm.

Practical trading: By my rules, as of Monday I can trade March vertical and calendar spreads, and May singles and straddles. Of course, shares are good at any time.

Good trading!

GPC: Parts for everything

Genuine Parts Co. (GPC) provides parts for the automotive after-market, industrial replacement parts, office products and electrical/electronic materials to customers in North America. The company's headquarters is in Atlanta, Georgia.

The auto parts group, operating under the brand NAPA, is a household name (at least if you're the member of the household who tinkers with the family car).

The industrial unit provides parts to fix machines big and small, and the office unit sells stuff ranging from adhesive notes and file folders to electric hand-dryers. The electrical/electronics unit sells products that seems to be aimed more toward guys who know how to use soldering irons.

So GPC is what a call a kitchen-sink niche company. They find an area where they can make stuff that's used all over the place, and then broaden the market in every way possible. A good capitalist practice.

The chart suggests that the practice is paying off, in the eyes of traders at least. 

Like nearly all companies, GPC has been on the rise since early 2009, the recession bottom, but the most recent increase, beginning Aug. 9, 2011, has been a steady alternation of increase and correction that has carried the price from $46.10 to a high of $65.38 on Jan. 19 , about a week ago. Since then the stock has traded sideways, mainly within the intra-day range of Jan. 19.

The price broke decisively into blue-sky territory in October 2011, surpassing all previous highs.

I've spoken about my liking for blue-sky stocks. I must also confess a weakness for corrections. Show me a stock that has gone up steadily without a break, and I'll conclude that it is most likely overbought. Periodic corrections, which shake out some traders, ensures that there's money on the table that might be interested in coming back into a position.

GPC had the most bullish chart of 17 stocks added today to Zacks list of strong buy recommendations. (See my essay "10,000 Charts" for a discussion of how I select stocks.)

GPC has a solid 19% return on equity with low debt, at 17% of equity. The price is also low compared to sales; it takes 82 cents of stock to control $1 in sales. Institutional ownership is 70%, which is neither low or high.

Taking the financials as a whole, I conclude that GPC has room to grow. It's easier to increase debt/equity from 19% than it is from a 30% starting point. If seven out of 10 shares are owned by institutions, that means there are institutions still out there that might eventually be interested in buying.

Earnings will be announced on Feb. 21 before the open. The quarterly dividend yields 2.78% at present, with the next ex-dividend date due in March.

The stock is well provisioned with options having slightly over-wide bid/ask spreads, despite the fact that its average volume is a bit low, at 653,000 shares.  The implied volatility is way low, at 26%, and stands lower than any level seen in the last six months. The peak implied volatility, in early October, was 52%.

With volatility that low, I'm reluctant to enter any short position on options. With volatility, the rule is buy low sell high, suggesting I would want to buy call options rather than taking advantage of time decay by setting up a short bull put spread.

The question, then, is whether the spreads are too wide for such low volatility. The May $60 calls have a bid/ask of 4.20/7.30, with open interest at present of 748 contracts. That's a liquid position, but a very wide spread.

Decision for my account: I'm really conflicted about this position, because of the bid/ask spreads. I'll pass for today and revisit the question on Monday. One alternative would be to buy shares rather than options, since the spreads are far narrower, but of course, the leverage is lacking.

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

Gold: A Chart Talk

I woke up this morning to lots of happy talk about gold. Indeed, happy days for gold may again be here soon, but -- peace to Ron Paul and all the other goldbugs out there -- not yet.

I am a gold sceptic. Here's my reasoning:

In the summer of 2007, as housing markets collapsed and people got nervous about the banks, gold began an huge rise from around $660 an ounce to $1,034 by March 2008, only to collapse back to $681 in mid-October.

From that point, gold began a truly epic rise that peaked in early September 2011 at $1,924.

Since then, the price has stairstepped down, hitting the its latest lower low the day after Christmas at $1,524.

Then began the current increase that has the financial chit-chatters all excited, bumping the price up to its current level, $1,738 (so far today).

These are truly big numbers, but they must be seen in proportion.

One reason I'm unwilling to break out the champagne to celebrate gold's "recovery" is because the current level is only a 50% correction of the decline from last September.

Secondly, that decline saw an interim lower high of $1,804 in November 2011. Gold's price is still well below that level.

So on the chart, we have a lower low, and a lower high. That's a downtrend. If the price breaks above $1,804, it would set a higher high and there may be cause for celebration. But that level is 4% away, and cautious traders would require that a higher low be set before the uptrend was confirmed.

Thirdly, the present correction of the rise from 2008 is a mere 15%. The prior correction, of the rise from 2007 into 2008, amounted to 93%.

The two corrections aren't even close to proportional. Now, there's no rule that requires proportionality, but a smart trader will want to see some proof on the chart before accepting a 15% correction as sufficient to mark the start of a significant rise.

Epic advances require epic challenges before the advance continues. Fifteen percent is no epic.

And at that level of analysis, the next higher high that would signify a long-term uptrend is 11% away.

Does that mean stay out of gold? Not for my account. There is money to be made in these short-term moves. There's money to be made in moves of an hour or half-hour, for that matter.

But the days are not yet back when a trader could buy gold and hold it for months and years as the profits rolled in.

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

AME: Broad specialists

Ametek Inc. (AME) makes electronic instruments and electro-mechanical devices.

That bloodless description hides the company's overwhelming number of  business divisions that serve specialized markets: Aerospace and defense, chemicals, floor care, measurement and calibration, power systems -- the list goes on and on.

AME appears to hold that middle stretch between upstream raw material manufacturers, such as a plain-vanilla chemical company, and downstream finished product makers. AME makes specialized things that enable the downstream companies to make finished goods from the materials of the upstream companies.

So is a company with a broad range of specialties. As I looked at their list of divisions and business units, my first thought was, "What a managerial challenge this company must pose."

But the suits at company headquarters in Berwyn, Pennsylvania -- just south of Valley Forge, where Gen. George Washington and his army spent a difficult winter -- seem to be doing quite well, thank you very much.

Their stock chart and financials point toward that conclusion, as do the big-money managers, whose institutions own 84% of the stock.

AME was one of 21 stocks added today to Zacks top buy list. Today's runners-up are VCBI in 2nd place, POOL in 3rd and PLCM in 4th.

The careful reader will say, "Wait, didn't I see AME mentioned in Private Trader a few days back?" And that is true: It was a runner up in my chart rankings when it was previously added to the Zacks list.

The Zacks rankings rely heavily on analyst opinion, which is volatile even in the best of times. So I've found that it's not unusual to see Zacks add a stock to its best buy list, drop it a few days later, and then add it again a few days after that.

This is one reason why I tend to be a short term trader.

I chose AME from the new additions because it had the most bullish chart. My essay "10,000 Charts" describes how I go about making my selections.

The most recent price rise began Oct. 4, 2011 at $30.87 and has continued, with three corrections, to today's high of $47.75 (so far). The recession low was $16.36 in March 2009, and that rise was interrupted by a major correction during the summer of 2011.


Implied volatility stands at 38%, at the low end of the range that has held since early December 2011. Low implied volatility implies trader complacence, which translates into a willingness to open bull positions. So the price and the implied volatility are in line.


I liked the chart because the most recent rise brought the price into blue-sky territory, above any previous trading. And the breakout, above the high of $47 set in April 2011, is recent -- it happened today.

So if the breakout is indeed what it appears to be, any bull position will be getting on the train as it leaves the station. If the breakout fizzles, which happens a lot with stocks -- well, that's what stop/losses are for.

Also, the rise of the last 10 days has been marked by slightly higher volume -- always a good validator that a rise has some enthusiasm behind it.

AME's return on equity is 20% -- approaching growth stock territory -- but the debt, at 0.54 times equity -- is a bit overly aggressive for my taste. However, borrowing costs are at historical lows. So as long as the money is put to productive use, that debt level isn't a deal-killer for me as a trader.

The price is expensive -- it takes $2.58 in stock to gain control of $1 in sales -- and that is an indicator of buying enthusiasm for AME.

As an aside, there are two ways of looking at the price/sales ratio.

A value investor will look for a low ratio, assuming that stock price will rise to equal sales which, in turn, will also be rising, at least if the value investor has chosen wisely. So the value investor, standing sedately on the station platform, quietly folds his or her umbrella and calmly steps on board, trusting that the train will leave the station sometime in the future.

A growth investor will look for a higher price/sales ratio, treating it as an indicator that the train has already left the station and it's time to madly ride his or her horse alongside the train and leap on the roof in order to not be left behind.

The stock is a bit low in liquidity, with average volume of 874,000 shares, and that is reflected in AME's weak options selection. There are only 10 strike prices in the February options, and open interest is in the low double digits with pathetic bid/ask spreads: 0.30/4.90 for the at-the-money February call option.

So any bull position, under my rules, would need to be in shares.

Earnings were announced this morning before the opening -- 63 cents per share vs. 61 cents expected -- so the next earnings will be sometime in April, as will the next ex-dividend date for the quarterly payout, now yielding 0.51%.

Decision for my account: I'm passing on AME because of the poor options selection. If I buy shares alone, then I lack leverage.

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

EMN: Global chemicals

Eastman Chemical Co. (EMN), headquartered at Kingsport in eastern Tennessee, makes chemicals, plastics and fibers in nine countries, serving a global market.

It's an upstream company selling the stuff that others downstream use to make other stuff. I have mixed feelings about upstream operations. They tend to deal in commodity products, with little to distinguish one company from its competition. But they tend to serve very broad markets, since what they produce can be used in lots of different ways.

But that's the story. And my analysis is all about charts.

I selected EMN from 15 stocks added today to Zacks top rank. (See my essay "10,000 Charts" for a discussion of how I select stocks.)

The charts, for the most part, were pretty awful. It was difficult to choose between them in their badness. It was a case of choosing the lesser of evils. In other words, it was very much like voting in an American election.

So EMN is the best of a bad lot, and as such, it's not too bad. The price began its current rise from a recession low of $8.88 in March 2009, and since then has risen with only three major corrections, none of which set a lower low.

The stock peaked in late April 2011 at $55.36 and from there began a brutal correction that sent the price plummeting by September down to $35.26. It has since began a rather slogging sort of recovery.

The most recent push up began Dec. 19, 2011 at $35.68, and the rise has carried to today's high of $47.11 (so far).

On this chart, I like the momentum from December. There was a stumble over the past eight trading days, but that has been erased, in my view, by today's strong rise.

I dislike the fact that the price is moving through territory that it surveyed as recently as last summer. There may well be some distressed money still in the stock that will be looking to get out at the next available break-even point.

Also, volume dropped off sharply in mid-January, from 3 million shares on Jan. 13 to 1.3 million the next trading day, Jan. 17. And it has dropped pretty steadily in the ensuing six trading days.

A rise without volume lacks conviction. A rise without conviction often signals that the end is near.

The return on equity is pretty flashy for an industrial materials maker: 30%. That's growth stock territory. The debt/equity ratio is 0.84, much higher than I like to see.

Institutional ownership is at 78%, which is a respectable level but not an enthusiastic one. And the stock is cheap in terms of sales, with a price/sales ratio of 0.94.

Implied volatility is at 39%, the lowest level since December, and has been declining since Jan. 17, when it stood at 44%.

Falling volatility suggests optimism that prices will continue to rise.

The company announces earnings after the close on Thursday, Jan. 26. It pays a quarterly dividend, now yielding 2.2%, with the next ex-dividend date due sometime in March.

EMN has a decent selection of options, with nine strike prices for February expiration and three-figure open interest in the close in strikes. The bid/ask spread is quite narrow, $2.75/$2.85 for the at-the-money February call.

Decision for my account: I bought June calls on EMN today, with a $45 strike price. With earnings so close, this was incautious. But we're in an earnings season marked with optimism, so I'm trading with the zeitgeist -- admittedly, at my peril.

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

MNST: Monsters in a can

Monster Energy, Java Monster, Monster Energy Extra Strength Nitrous Technology, Monster Rehab, Peace Tea, Hansen’s, Hansen’s Natural Sodas, Junior Juice, Blue Sky, X-Presso Monster, Vidration, Worx Energy, Admiral, Lost Energy, Hubert’s, Rumba, Samba and Tango.

The company? The chart? The finances? Fuggedaboutit! Monster Beverage Corp. (MNST), first and foremost, simply has some of the coolest drink names in the business.

That's not exactly a bullish indicator, of course. Monster's energy drinks don't yet threaten to stomp all over Coke and Pepsi like Godzilla did to Tokyo.

But the chart is fairly impressive. And the financials are in growth stock territory. And the company's stock is emulating one of its drinks, Blue Sky. The price has been in blue sky territory, above all previous prices, for more than four years.

The stock touched its recession low of $11.73 in November 2008. It's interesting to note that the month, despite the sharp fall, ended with the stock at $29.75. Altogether, the monthly range was an astonishing $18.24, nearly two-thirds of the closing price.

Since then the price has been on the upward track, with a few short-lived corrections.

The most recent leg up began on Jan. 12 at $93.13, and made a highest-high today of $105.99 (so far).  

The sharpest daily rise of the leg, last Friday, showed a peak in volume, which declined significantly the next  day, Monday. The peak volume for MNST the past few days has tended to come in the final hour of trading, and that level has declined for three days running.

The highest volume so far today came in the 11 a.m. Eastern hour, which had the smallest distance of the day between the open and a higher close.

Generally, a rise on declining volume suggests there's not much conviction among bull-side traders. So the volume I'm seeing on MNST's charts suggests that traders are losing interest.

MNST had the most bullish chart among 24 stocks added today to the Zacks top buy rating. NVLS was 2nd, followed by ROP at 3rd and POL at 4th. (See my essay "10,000 Charts" for a discussion of how I screen.)

MNST's return on equity is 32%, a figure that indicates really effective management, and it has zero debt. So the company is strongly positioned to handle crises that might arise in the course of doing business.

Strong financials alone will often bring in investors. That is the case with MNST, whose stock price has been bid up to $5.67 for each $1 in sales. Institutional ownership is 72%, a respectable level but not in the top rank.

The average volume is 888,000 shares. That's a good degree of liquidity, and it supports a handsome selection of options -- 17 strike prices at $5 intervals, with narrow spreads.

Average implied volatility is 36%, compared to 19% for the S&P 500. High volatility is sometimes treated as a measure of fear -- the higher it is, the more traders are worried about the company.

However, MNST's volatility was running in the upper 40% range last November. It bottomed on Jan. 13 at 29%. So the level is low compared to mid-term levels, but rising in the short run. Near term, there's a divergence, and the direction is back toward the November levels. To complicate the picture, volatility fell today.

That pattern must be figured into any decision about how to play the stock. A trader wants to buy low volatility and sell high volatility. That means for low volatility, buy stocks and options for a debit. For high volatility, sell options for a credit.

MNST announces earnings on Feb. 23. It is scheduled to undergo a 2:1 split on Feb. 15.

Decision for my account: I bought call options today. I settled on the $105 strike, just in the money, with a June expiration. I went for a long, debit position because of the mid-term low implied volatility and today's downward turn.

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

Covered Calls: A difficult season

'Tis the season for covered calls! (Fa-la-la La-la-la and all of that.)

And a difficult season it is. The January calls expired Saturday, and I'm moving my money over to the February calls, which expire Feb. 17.

What's difficult?

First, it's a short options month, expiry to expiry -- 27 days rather than the ideal 30. So that's three less days of theta gain on the short options.

Second, it's an earnings month and a very significant one, since this is being thought of as the earnings season that determines whether the recovery is in fact catching fire. Earnings disappointments are certain to meet with strong reactions from traders.

Third, volatility is way, way low. The VIX, which measures the volatility of S&P 500, is at a pathetic 18.16% about 75 minutes before the close. At the start of last November, it was double that, at 37.53%. So the short options are returning much less than they were when volatility was higher.

My analysis over the weekend uncovered 11 stocks that I considered to be reasonable covered call plays. They are, in descending order of return (at the time of my analysis): LVS, ESRX, STX, LULU, CAT, DOW, AAPL, MYL, CBS, MON and LRCX.

(The return can change dramatically with market moves, so I always recalculate before trading.)

I didn't even bother to screen exchange-traded funds, which always have lower volatilities than stocks do.

My criteria are volume of around 3 million shares or more, price of $20 or more, an option premium of $1 or more, and a return, if the option is exercised, of at least 3%. I had to fudge the premium and the return in order to find any covered calls this trip out.

Also, I picked from a pool of stocks ranked buy or strong buy under the Zacks system, which is heavily titled toward analyst opinion.

I opened a few positions for my account today, and will leg in with a few more over the next couple of days. But honestly, it's arguable that traders will do better with instruments other than covered calls in the present environment.

It's also arguable that buying prior to Wednesday is pure foolishness. The Federal Open Market Committee makes its rates announcement on that day, Fed Chairman Ben Bernanke holds a news conference, and the FOMC members, for the first time ever, release their individual forecasts of future rates.

So the cautious trader will stand back until late or Thursday. My thought was that the FOMC's actions will most likely be surprise free, and that growing confidence in an economic recovery will continue to dominate, so I threw caution to winds. I shall soon find out if it was an act of sheer brilliance or one of total stupidity.


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

EXR: Something EXtRa

Extra Space Storage Inc. (EXR) is a real-estate investment trust specializing in self-storage facilities. One side-effect of the 2008 collapse of capitalist finance was that more people are renting because fewer people can afford, or get financing, to buy a home.

I rent -- I prefer to keep my money liquid in equities and currencies -- and I can tell you that it is an absolute fact that every renter needs more storage space. So arguably, EXR seems to have seized the zeitgeist and is riding it to Profitburg.

The company is based in Salt Lake City, Utah and owns 660 self-storage facilities all over the country.

The price began stair-stepping up in mid-March 2009 from its recession low of $4.93. The most recent leg up began on Oct. 4, 2011 at $17.29 and has continued to rise steadily with three quite mild corrections.

The stock set a new high today but quickly retreated into the range of Friday's price rise and is at present (about three hours before the close) doing a good imitation of a spinning top on the candlestick chart, a sign of indecision.

EXR is a blue-sky stock. Last March it exceeded its pre-recession high of $20.55, set in 2007 and has stayed above that level since last October.

It is the most bullish chart out of 24 that have been newly ranked strong buy under the Zacks system, which is heavily tilted toward analyst opinion. FL was in 2nd place, URI in 3rd and SNX in 4th. (See my essay "10,000 Charts" for a discussion of how I screen stocks.)

The blue-sky nature of the EXR chart was decisive in its selection for the top spot. But there is a shadow on the chart: The volume.

One difficulty in analyzing equities during this period is that volumes are down. Increasing volume adds credence to a price increase, but the price rises I've seen during recent screens have generally been on declining volume.

I could weave that observation into a narrative of a weakening bull market -- prices are up but traders really aren't all that interested.

Or I could stitch up a counter-narrative asserting that traders are sitting on the sidelines until the Euro crisis is resolved, and then there will come an explosive rise in the markets (no doubt accompanied by fireworks and the EU's anthem, courtesy of Beethoven's "Ode to Joy").

But honestly, I don't know what to make of it. So I'm simply choosing the best of what's at hand, and setting careful stops/loss levels. The future is unknown. The past is untouchable. Only the present lies within my grasp.

EXR, quite frankly, lacks financial bling. Its return on equity is a pathetic 4.6%. It is wallowing in debt, with a debt/equity ratio of 1.23.

Yet, its price has been bid up to nearly eight times sales, meaning as a trader I've got to cough up $7.76 to buy $1 in sales. Institutions love it, owning 95% of shares. It's a liquid stock, with an average volume of 758,000 shares a day.

So, bling or no, the big money obviously thinks EXR is a decent play.

EXR pays a quarterly dividend yielding 2.2% at present, The next ex-dividend date will come in March. Earnings will be announced Feb. 21.

The options inventory is weak -- only five strike prices for February with no open interest to speak of. Even the next month out has top open interest of only 104 contracts. And the bid-ask spreads are huge: $0.50/$5.40 for the $22.50 February call, for example.

 So EXR is a shares plays in my book. Which has the advantage of providing a dividend, so it's not all bad.

Decision for my account: I bought shares in EXR today. I don't like the price/sales ratio, but who am I to argue with the chart? Or the big money?



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

The Week Ahead: Policy and a Report Card

This week's focus is monetary and fiscal policy, and the 1200-pound-gorilla of report cards on how we've been doing. It is a week with more than usual potential to motivate traders.

Monday is quiet -- just a few T-bill auctions.

On Tuesday, the Federal Open Market Committee begins a two-day meeting to discuss monetary policy, and President Obama, at 9 p.m. Eastern, gives the State of the Union Address to Congress, wherein fiscal policy -- read "jobs" -- is sure to stand front and center.

Oh, and in an action having potential impact on future policy, GOP presidential candidate Mitt Romney will make available his 2010 tax return and a 2011 estimate sometime on Tuesday, no doubt hoping the details -- he estimates his Federal tax rate at 15% -- will be buried in an avalanche of Obama budget proposals.

Hmmm. Now if I were one of the president's speech writers, I would be looking for a way to say something about rich people's taxes that would land at least a mention of Gov. Romney's tax return in paragraph 2 of any State of the Union story. 

The Federal Reserve announces results of the FOMC meeting on Wednesday, at 12:30 p.m., and Fed Chairman Ben Bernanke follows with a news conference at 2:15 p.m.  

The Fed's day will be especially interesting because FOMC members will, for the first time, release their individual forecasts for the central bank's key interest rate: The Fed Funds Rate, now standing at 0.08%. The fedsters' forecasts will be anonymous -- more's the pity -- but the release will provide insight into the body's thinking, and the breadth of the forecasts will say something about their unity of opinion, or lack of.

Also on Wednesday, the energy sector gets a weekly petroleum inventory report at 10:30 a.m., followed at the same time on Thursday by the natural gas report.

But Thursday will be dominated by three major econ data dumps: Durable goods orders and weekly jobless claims at 8:30 a.m., and new home sales at 10 a.m.

Durable goods and new home sales are basically confidence indicators, for big manufacturers and regular families, respectively. Weekly jobless claims say something about why confidence stands where it does.

Finally, on Friday, The Report Card -- the Gross Domestic Product -- gives us a first look at how we were doing as an economy in the 4th quarter of 2011.

This week's GDP is the advance figures -- the first stab at calculating growth or decline. There are two more Q4 releases -- the preliminary in February and the final in March -- that will refine those numbers.

And of course, all of this is happening at the peak of 4th quarter earnings releases, as corporations rate their own performances, as the law requires.

So there are a lot of moving wheels this week, which will make it all very interesting.

Practical trading: By my rules, as of Monday I can trade February vertical, calendar, diagonal and butterfly spreads, iron condors and covered calls, and May singles and straddles. Of course, shares are good at any time.

Good trading!

CBS: Watching the Eye

CBS Corp. (CBS) is television, one of what used to be called the Big Three television networks.

But it is also an information/entertainment conglomerate -- films, the premium cable channel Showtime, radio stations, outdoor advertising... Even books: CBS owns Simon & Schuster, one of the giants of the book publishing industry.

So when analysts start talking nice about CBS, it's good to listen. CBS was among the 21 companies raised to Zacks top rank today.

The CBS chart didn't make the cut when I did my screening, but for fairly disputable reasons. The price dropped sharply today, setting a higher high near the open but then dropping to a lower low at a micro level.

The volume on the weekly chart has declined steadily during the most recent rise, from $17.99 in early October 2011. Declining volume on a rising price is not a bullish sign.

And the chart looked as though CBS is setting a double top, or perhaps it could turn out to be a head-and-shoulders -- either way, a reversal pattern.

Otherwise, it's a great chart. The stock has risen from a recession low of $3.06 in early March 2009 to a peak of $29.68 on July 18, 2011.

That peak would be the first top, or the first shoulder, if the stock is indeed readying for a major reversal pattern. A break above that level could indicate formation of the head, or it could be a straight breakout -- a very big deal.

Today's high was $28.87, so that major breakout/resistance level isn't far away.

CBS has a respectable return on equity of 13%, and a slightly high debt/equity ratio of 0.61.

The price is reasonable for a growing stock -- a 32% premium over sales.

With 85% institutional ownership, it's clear that the big money has taken a fancy to CBS.

Average volume is 5 million shares, so its a very liquid play with a full suite of options and narrow spreads.

Decision for my account: I like the chart once the price breaks above the current high and stays there rather than falling back, as it did today. I like it even better once the price moves above the July peak of $29.68. 


I don't plan to open a position today. I'll keep an eye on CBS for a future play, and shall consider it for February covered calls, to replace my January covered call holdings, which expire on Saturday.



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

GOOGle's stumble: A post-mortem

Google Inc. (GOOG) stumbled big time at the open after missing a revenues projection.

How bad is it on the chart? What were the warning signs?

Amusingly, in light of all the OMG LOL GID* chit-chat that followed the downward gap, from Thursday's close of $639.57 to today's open of $590.53 -- a decline of 7.7% -- GOOG has yet to set to set a new lower low in the rise that began in early October 2011.

A lower low would require a drop below the Nov. 25, 2011 low of $561.33.

So from a chart standpoint, it's not the end of the world. Subsequent moves may indeed prove to be apocalyptic, but GOOG isn't there yet.

And today's move should not have come as a total surprise. The chart showed signs and symptoms that something was amiss.

The price peaked, most recently, at $670.25 on Jan. 24. That day was followed by three trading days of wide intra-day declines that brought the price down to a low of $616.91 on Jan. 10. The decline overall was 8%.

The price then spent four days in a sideways pause -- a balance between buyers and sellers of the shares -- and then on Thursday gapped up on high volume, fell back into the prior day's range, and then retraced upward, forming a candlestick pattern called a hanging man, signalling a top reversal.

If I had been daytrading on Thursday, I might have initially treated the move as a breakout and bought shares, but I would have sold them late in the day as I saw the hanging man developing.

And frankly, I doubt that I would have played the breakout. The prior multi-day decline of 7.7% is large, and I'm usually reluctant to play counter such trend on the basis of a single day's move, especially when the preceding sidewinder was only four days.

(At least with stocks. I might have taken it on a currency pair, where trends tend to be more stable and breakouts more reliable.)

At any rate, the lesson for traders is a banality from the old TV police drama Hill Street Blues: "Be careful out there."

And more banalities from me: Keep your wits about you, and keep your eyes on the chart.
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* Google is Dooooomed!

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