More Liquid Buys: DFS, LOW, AET, CBS

In a posting on Saturday I set out my discontent with the trading prospects my methods were producing.

In response, I built a pool of 51 stocks rated top buy or buy by analysts, and from those used my bracket method to select those with the most bullish charts.

The Saturday posting listed the champions. Today's posting analyzes the runners-up.

I've found in working with charts that the difference between a champion and a runner up is usually a hair's breadth. Well, sometimes a pencil's breadth. So the four stocks that follow have charts that, in my opinion, qualify as among the best of the better.

Discover Financial Services (DFS) is the Discover card and Diners Club card -- products that stand well below Visa and Mastercard in the hierarchy of easy credit. The Riverwoods, Illinois company also has a direct banking segment and operates a global credit-card payments network, PULSE.

I last wrote about DFS on April 13 (read it here), and nothing has changed since then. the price continues to hold in a sideways pattern, where a move above $33.34 counts as a very near term breakout and above $34.43 as an unambiguous resumption of the bull trend.

I won't repeat the analysis here and shall refer the reader to that earlier posting.

Decision for my account: I own DFS as a diagonal spread and would be willing to open a bull position on the current trend.


Lowe's Companies Inc. (LOW) is a home improvement retailer, selling from 1,745 big-box stores, most in the United States  but with a few in Canada and Mexico.

One statistic I find fascinating: Mooresville, North Carolina company's stores amount to 197 million square feet of retail selling space. That's a lot of stuff just waiting for happy consumer to open their wallets and buy buy buy.

I think the theory behind Lowe's is that buy buy buy they must. Everyone has delayed spending amid the uncertainties of the recession. As growth continues to pick up, the theory goes, homeowners will begin flocking the Lowe's to buy supplies so they can make those much needed repairs and improvements.

LOW's most recent leg up began Jan. 10 at $24.75 and peaked April 16 at $32.29 before beginning a so-far shallow recession that has lasted four days.

The price is approaching its pre-recession peak of $35.74, set in 2007, so there is a lot of historical resistance to further gains, at least if you buy the theory that old price levels constitute effective resistance. From my short-term perspective, I'm unconvinced that they do.

LOW has return on equity of 11% and carries a slightly high load of long-term debt amounting to 46% of equity. If I were looking for growth stocks for the long term I would turn away from those figures.

Institutions own 77% of shares -- also a bit low for a growth stock. The price is discounted. It takes only 76 cents in shares to control a dollar in sales.

Earnings are cyclical, peaking in the 2nd quarter, the spring season when a homeowner's fancy turns to projects. Q2 earnings per share rose in 2010 and 2011 from the year-ago quarter, but not by a lot.

LOW on average trades 10.6 million shares. That high level of liquidity gives it an excellent options selection, high open interest and narrow bid/ask spreads.

Implied volatility stands at 26%, which is near six-month lows. It has been falling since April 16. Options traders are pricing in a 68.2% chance that the stock will close between $29.27 and $34.03 a month from now, a 7.5% gain or loss.

Lowe's next publishes earnings on May 21. The stock goes ex-dividend on Monday, April 23, for a quarterly payout yielding 1.77% annualized.

Decision for my account; I intend to open a bull position on LOW. With implied volatility falling I would tend to play LOW's for a net debit, perhaps as a bull put spread. I would also look at it as a diagonal spread prospects.

Aetna Inc. (AET) is a health- and life-insurance behemoth. The Hartford, Connecticut company is listed in the Fortune 100.

AET's chart screams uncertainty. It has been stairstepping up since its 2009 recession bottom in a series of rapid advances and selling panics.

Like all companies in the health industry, Aetna faces great regulatory uncertainty. They know what their regulatory environment will look like of the Obama-era health reforms stands. But given the Republican party's strong vow to repeal as much of the reforms as possible, that known regulatory ground could melt away in a vote.

The outcome of this year's congressional and presidential elections will do much to resolve the uncertainty.

The most recent advance began March 29 at $46.26 and peaked the next day at $51.14. The price then corrected down to $47.07 (a higher low) on April 16, and has since resumed a sharp rise, up to $49.64 on April 19.

Normally, I would say that prudence dictates waiting for a breakout above $51.14 before entry. But given the explosive nature AET's advances, a trader can only open a position before the next advance and hope it materializes, exiting if the price turns down again.

On the chart, even with the pullbacks, AET has been in an uptrend since 2008.

Aetna has return on equity of 20% -- the low end of my range for growth stocks -- but with a bit too much in long-term debt, amounting to 44% of equity.

Institutions, however, love the company. They own 89% of shares. Yet the price is very cheap. It takes only 51 cents to control a dollar in sales.

The company's earnings are seasonal, but in an inverse sort of way. The 4th quarters earnings are low, and the other three generally form a plateau. The three-quarter plateaus were higher than the prior year in 2010 and 2011.

AET on average trades 2.7 million shares. The options selection is excellent, open interest is adequate and bid/ask spreads are narrow at the money.

Implied volatility stands at 31%, well above the six-month low of 25% set on March 21. Volatility has been falling since April 19.

Options traders are pricing in a 68.2% chance that the stock will close between $44.84 and $53.58 a month from now, an 8.9% gain.

Decision for my account: I conditionally intend to open a bull position on AET. Given the falling volatility, I would structure it as a net credit trade, perhaps a bull put spread. One note of caution: AET closed Friday with a spinning top candlestick, with the price unchanged from the opening bell. That is a hesitation pattern, and could signal a reversal, which would negate any plans I might have to open a bull position immediately.


CBS Corp. (CBS) is a media company. It is CBS TV and radio, of course, but also Showtime, The Movie Channel and the CW network on cable, the publishers Simon & Schuster, Pocket Books and Scribner's, and Westinghouse Electric Corp.

The New York City company got back into the movie production business after an absence, leading off with the 2010 film "Extraordinary Measures".

CBS's chart has completed seven days of recovery from a sharp correction that carried the price from a swing high of $34.17 on April 3 down to $3.25 on April 10. The pre-correctoin leg up had carried the price from $23.35 on Nov. 23, 2011.

The prudent trader will wait for a break above $34.17 before entry. Those of a more speculative bent, like me, might well get in ahead of time and see what develops.

CBS has return on equity of 13% with long-term debt amounting to 60% equity. Institutions own 85% of shares. The price is at a premium. It takes $1.52 in shares to control a dollar in sales.

Earnings were generally on the rise, with a few failures, into 2011. Earnings per share peaked in the 2nd quarter, and then fell a bit. The most recent quarter was high but had not yet equalled the 2nd quarter peak.

CBS trades 7.9 million shares on average, sufficient liquidity to support an good selectoin of options, adequate open interest and narrow bid/ask spreads.

Implied volatility stands at 32%, well above the 23% six-month low set on March 16. Volatility has been in a plateau since the April 10 peak of a rise from that low.

Options traders are pricing in a 68.2% chance that the stock will close between $30.24 and $36.28 a month from now, a gain or loss of 9.2%.

CBS next publishes earnings on May 1. The stock goes ex-dividend in June for a quarterly payout yielding 1.2% annualized.

Decision for my account: I intend to open a bull position on CBS. It's hard to know what to do with the implied volatility being so neutral, and I'll reserve a selection of position structure for when I actually make the purchase.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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.

Liquid Buys: TYC, TJX, UNH, GPS

Regular readers will know that my usual methods of finding trades -- selecting the most bullish chart among new additions to the Zacks top-buy list -- has been failing me of late.

Perhaps it is my own tilt in favor of liquidity. Perhaps the analyst community, upon which Zacks relies, has turned its attention more to mid- and small-cap stocks. Perhaps it is a phase of the moon or the positions of the planets in the Zodiac.

No matter. When Plan A doesn't work, there is always a Plan B, and a Plan C, if needed.

Following are the most bullish charts of 51 stocks ranked as buy or top buy by analyst consensus.

I selected using my usual bracket method -- see the "Methodology" section at the end of this posting for a more detailed description -- breaking the mass of symbols into four smaller brackets. The four stocks analyzed here were the winners of those brackets. In another posting this weekend, I'll take up the losing semi-finalists.

Tyco International Ltd. (TYC) is one of the massive "we do everything within our area of expertise" global conglomerates. The Schaffenhausen, Switzerland based company on security systems -- against both fire and theft -- as well as sensing and flow control, which can be seen as being related to the fire protection segment.

They also make electrical and metal products that can be seen a essential for carrying stuff to put out fires and signals that all is well or ill from one place to another.

"Specialty" for companies like Tyco is defined very broadly indeed.

TYC's most recent leg up began in September 2011 at $38.51 and rose to a swing high of  $58.66 on March 28.

From that point it corrected sharply down to $53.02, and then resumed its rise for the past eight trading days, reaching a high Friday of $55.88.

The caution trader will wait until the swing high of $58.66 is broken. The all-time high of $63.21, set in January 2001, provides potentially major resistance, if you believe that resistance levels hold sway for years. I'm not entirely sure that such is the case, but my opinion isn't universally shared.

Tyco has return of equity of 10% -- a steady pace but hardly the stuff growth stocks are made of -- and long-term debt worth 30% of equity. My preference is for debt of 10% of equity or less, but for short-term trades the debt level tends to be irrelevant.

Institutions own 87% of Tyco's shares, yet the price remains low relative to sales. It takes $1.48 in shares to control a dollar in sales.

Earnings have remained fairly stable for the last three quarters, rising gradually prior to that with a tendency to form plateaus.

On average TYC trades 3 million shares, enough to give a fair selection of options with good open interest and a fairly narrow bid/ask spread.

Implied volatility stands at 23%, slightly above six-month lows, and has been declining since April 11. Options are pricing in a 68.2% chance that TYC will close between $51.56 and $59.02 a month from now, a 6.8% gain or loss.

TYC next publishes earnings on April 26. The stock goes ex-dividend on April 25 for a quarterly payout yielding 1.81% annualized.

Decision for my account: I'll consider opening a bull position on TYC after earnings are announced. The question is whether to go for a net debit or net credit position. Implied volatility is low, suggesting a net credit, but is falling, suggesting a net debit. I'll decide which when (and if) I trade.

The TJX Companies Inc. (TJX) is clothes shopping for the budget conscious. And who isn't budget conscious these days? Think T.J. Maxx and Marshalls in the United States, Canada and Europe.

Being a retail outlet, TJX is extraordinarily sensitive to changes in the public mood. My take is that the public is so disgruntled and moody that it can't get much worse without everyone taking to the barricades in a replay of Les Miserables. So I'm optimistic about retail and other mid-sensitive plays.

TJX began its most recent leg up in September 2011 at $25.55, hitting an all-time peak of $41.58 on April 18. The rise was punctuated in early April by a three-day correction.

TJX Companies has return on equity of an extraordinary 47% with rather low debt amounting to 25% of equity.

Institutions own 96% of shares, yet the stock is cheap, just like Marshall's clothing, costing but $1.33 in shares to control a dollar in sales. Earnings have accelerated sharply the last three quarters.

TJX on average trades 5.2 million shares, with good open interest and a fairly narrow bid/ask spread but with a mediocre options selection.

Implied volatility stands at 27%, which is near the six-month low. It can be counted as either falling gently or undulating aimlessly, depending upon one's frame of mind.

Options are pricing in a 68.2% chance that the stock will close between $37.78 and $44.26 a month from now, a 7.9% gain or loss.

Given the low and meandering nature of the implied volatility, I would play TJX as a net credit position, buying volatility low in the hope of selling it high.

TJX Companies next publishes earnings on May 15. The stock goes ex-dividend on May 8 for a quarterly payout yielding 1.12% annualized.

Decision for my account: I intend to open a bull position on TJX if the present uptrend holds into next week. Most likely I'll structure it as a bull call spread expiring in August. I may also look at it as a diagonal spread.

UnitedHealth Group Inc. (UNH) is one of the massive health-insurance companies that dominates the American system of medicine.

The Minnetonka, Minnesota company controls a commanding position in the industry. It is also under regulatory stress as health-care reform in the United States seeks to control the cost of becoming and staying well.

UNH completed its most recent correction in November 2011 and on Nov. 25 began another rise from $43.55 up to Friday's high of $59.71. That leg up was punctuated by three minor corrections.

The price is at its pre-recession high of $59.46 set in December 2007 and is near its all-time high of $64.61, set in December 2005. I don't totally discount the possibility that UNH is in a range of heavy, though aged, like a fine wine or Roquefort cheese resistance.

UnitedHealth Group's return on equity is 19%, just below growth-stock territory, but with slightly elevated long-term debt amounting to 45% of equity.

Institutions own 87% of shares, but the price is at a steep discounts. It takes only 60 cents in shares to control a dollar in sales.

I attribute that in part to massive uncertainty about what regulatory environment lies ahead for UNH. It depends upon the outcome of the American election, both for president and two houses of Congress. Ultimately, Dear Reads, if you are a citizen of the United States, it depends upon you.

Earnings remained at a plateau during 2011 but jumped sharply the first quarter of 2012.

UNH on average trades 6.5 million shares, enough to provide an adequate selection of options with high open interest and fairly narrow bid/ask spreads.

Implied volatility stands at 26% and on Friday rose slightly from its six-month lowest low. Options are pricing in a 68.2% chance that the price will close between $55.07 and $63.95 a year from now, a gain or loss of 7.5%

UnitedHealth Group next publishes earnings on July 19. The stock goes ex-dividend, most likely in September, for a quarterly payout yielding 1.09% annualized.

Decision for my account: I intend to open a net credit position on UNH. I shall most likely structure it as a bull call spread, although I'll also look at it as a possible diagonal spread.

The Gap Inc. (GPS) is clothing, accessories and personal care poducts with a touch of the cool. Its holdings including the Gap stores, Old Navy and Banana Republic. The San Francisco, California company has outlets in the United States, Canada, Europe, the Middle East, Africa and East Asia.

The company began a rapid rise on Feb. 2 with, appropriately, an opening gap that carried the price from a prior-day close of $19.45 to an opening of $21.48.

The most recent leg up, following a nine-day correction, began April 12 at $25.62 and has carried the price to Friday's high of $27.95. That level brings the price above its pre-recession levels, although the all-time high, $53.75, was set in 2000.

GPS is most decidedly not a blue-sky stock.

The Gap has return on equity of 24% -- growth stock territory -- but with a higher level of long-term debt than I like to see, amounting to 60% of equity.

Institutional ownership is rather low, just 57% of shares, and the price is also on the low side; it takes 94 cents in stock to control a dollar in sales.

Earnings are seasonal, peaking like most retail in the 4th quarter. This year's Q4 earnings were down sharply from the year-ago figure.

GPS on average trades 7 million shares, sufficient liquidity to provide an excellent selection of options with high open interest and narrow bid/ask spreads.

Implied volatility stands at 37%, well off the six-month low of 31%. It has been declining since April 17. Stock traders are pricing in a 68.2% chance that the stock will close between $24.89 and $30.81 a month from now, a 10.6% gain or loss.

Gap next publishes earnings on May 17. The stock goes ex-dividend sometime in July for a quarterly payout yielding 1.8% annualized

Decision for my account: I intend to open a bull position on GPS. I'm uncertain about whether to for a net credit or net debit playing. My choice will depend upon what implied volatility is doing the day open the position.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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.

TSCO: Farm and yard

Tractor Supply Co. (TSCO), despite having a name that creates visions of the hardy American farm family plowing the prairie to feed the world, isserving a portmanteau market.

The Brentwood, Tennessee company really does have supplies that are used by people running real tractors, but it also has stuff needed for the upscale suburban big back yard. Not to mention clothing, pet supplies, and toys for the little kiddos.

So if I'm a serious farmer, will Tractor Supply be my first stop? Or are the company's 1,085 stores in 44 states mainly feeding lifestyle and image aspirations? The first, more specialized market is narrower but likely with greater margins. The second model serves a broader market but one with greater competition that keeps margins lower.

And with such a diffuse range of product types, can it serve both markets well?

Tractor Supply had the most bullish chart among nine stocks added today to the Zacks top-buy list.

TSCO, which has been rising since its recession bottom in 2009, began its most recent leg up on Jan. 6 at $69.31, and has risen steadily up to Thusday's higher high of $101.20.

The stock has been in blue-sky territory -- setting all-time highs -- since September 2010.

The company is a money maker, with return on equity of 23% and no long-term debt. That makes it a growth stock by my definition.

Institutions own 84% of the shares and yet the price doesn't carry an outrageous premium. It takes only $1.68 in shares to control a dollar in sales.

Earnings show a seasonal pattern, peaking each year in the 2nd quarters -- think spring planting. That quarter's sales were up in 2010 and 2011 over the year-ago quarter. The 2012 results won't be out until July, but analysts are forecasting another rise.

On average TSCO trades 1.4 million shares a day. That's enough to give a reasonably good options selection with three- and four-figure open interest.

The bid/ask spreads are a bit wide, amounting to 8.8% on the May strike nearest to current price. Compare that to a 0.5% spread on the comparable strike for SPY, the massive exchange-traded fund that tracks the S&P 500.

Implied volatility is above the six-month lows but has been falling since April 11. Because of the marked decline, I would tend to play TSCO with a net debit position, such as a bull put spread.

Options are pricing in a 68.2% chance that the price will close between $90.77 and $108.47 a month from now, an 8.9% gain or loss.

Tractor Supply next publishes earnings on April 25. The stock goes ex-dividend sometime in June for a quarterly payout yielding 0.48% annualized.

Decision for my account: I won't trade TSCO this close to earnings. More broadly, I'm passing because of the wide bid/ask spread. I prefer narrower spreads so that I need less price movement to overcome the cost of the transaction. Otherwise, I like the chart and love the financials. I would probably open a bull positions, post-earnings, if I were interested in doing a shares trade.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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.

RRR: Zacks' bad call

RSC Holdings Inc. (RRR), which rents equipment in 43 U.S. states and three Canadian provinces under the name RSC Equipment Rentals, had the most bullish chart of 10 stocks added today to the Zacks top-buy lists.

However, it has a merger agreement with competitor United Rentals Inc. (URI), and the deal is scheduled to be completed  by April 30.

So, this is not a trade for me. I don't play news reports. I'm a trend-based trader. And whatever RRR's chart looks like today, that chart will be coming to an end very soon.

Bottom line: I think RRR was a very bad call by Zacks.

Zacks' selection system is largely automated -- plug in the parameters and see what pops out -- and  they apparently didn't adjust for RRR's impending absorption, thereby illustrating a flaw of any automated system, be it based on chart indicators, analyst opinion or company financials.

Algorithms can only go so far. At a certain point, they cannot substitute for human judgment.

I really dislike all the other charts added to the Zacks top-buy list today, so I won't be writing about any of them, either.

And as for Zacks: Shame on you for not performing due diligence in constructing the top--buy list, or at least for failing to explain why RSC Holdings had a place on it.

A final thought: This is the second day in a row when the most bullish chart on the Zacks top-buy list has been flawed, raising the question of whether Zacks in the present market environment is in fact a reasonable screening tool.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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.

EMC: Information plumbers (updated)

Update: EMC missed analysts' estimates when it announced earnings this morning, and the stock slid by nearly 5%. In my decision yesterday, I said I would wait for earnings before opening any EMC position. That proved to be the right choice. In light of the earnings announcement, I won't be trading EMC at this point. Here's the Bloomberg story.

EMC Corp. (EMC) designs the electronic plumbing of the Information Age, developing, installing and supporting the infrastructure that lets companies store and move their data. EMC will announce earnings before the opening on Thursday.

Many companies have put off IT expansion plans during the recession. The recession is over and the recovery is limping forward. In my book, this is a time when "plumbers" like EMC can expect growing business as their customers catch up with un-met needs.

The Hopkinton, Massachusetts Fortune 500 company is ranked, by Fortune, as the third most admired computer company in the world.

EMC ranked among the four most bullish charts of 20 stocks added today to the Zacks top-buy list.

None of the charts was unambiguously bullish, and I've written about two of them, CBS and DDS, previously this year. I've selected EMC out of the top tier because it has bounced up from a correction in the last week and also has room to the upside for a major move if it successfully breaks above $30.

EMC began its present uptrend on Dec. 29, 2011 at $21.49, peaking at $30 on March 28. A correction four trading days after the peak brought the price down to $27.93 on April 11. Since then, the price has risen to a post-correction high of $29.40 on Tuesday.

What's interesting is the history above $30. EMC has already broken above resistance set as it recovered from the stock's depth of under $6 per share after the tech bubble burst. A rise above $30 leaves little in the way of resistance all the way up to the tech bubble peak of $104.94 set in September 2000.

So, a fresh breakout and room to exercise its ambitions.

There is, of course, also room to question whether 12-year-old resistance means anything. If it doesn't, then that's even more bullish for EMC, since it anything above $30 can be treated as blue-sky territory.

EMC has return on equity of 14%, which puts it below my growth-stock standards. Long-term debt, however, is quite low, amounting to only 10% of equity. So the lower return is palatable.

Institutions own 80% of shares and have driven the price up so that it takes $3.04 in shares to control a dollar in sales.

EMC's earnings show a seasonal pattern, peaking in the 4th quarter. That quarter's earnings have been on a steady rise for two years.

The stock is highly liquid, with average volume of 18.4 million shares. The is reflected in the options inventory, which has narrow bid/ask spreads and heavy open interest.

Implied volatility stands at 29%, around the mid-range for the past three months. It has been declining sharply from Tuesday.

Options are pricing in a 68.2% chance that EMC will close between $26.59 and $31.45 a month from now.

EMC next publishes earnings before the open on Thursday. Given that, it is hard to say whether to assume a greater decline in the volatility, suggesting a short, net credit position, or a reversal, implying a long, net debit position.

Decision for my account: I plan to open a bull position of some sort, but not until after earnings are announced tomorrow morning. And that decision, of course, is tentative, depending upon what the earnings are and how the market responds. Overall, though, there is nothing at this point that I dislike about EMC as a trade.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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.

JBHT: Keep on truckin'

J.B. Hunt Transport Services Inc. (JBHT) runs trucks that carries goods throughout North America. It is one of the largest transportation companies in the United States.

JBHT had the most bullish chart out of 23 stocks added today to the Zacks top-buy list. The paint company Sherman-Williams Co. (SHW) was a very close second.

As manufacturing recovers from the recession, there is more business for truckers like J.B. Hunt. The Lowell, Arkansas company is providing one of the basic services that allow the economy to keep on truckin'.

JBHT's most recent leg up began March 8 at $50.58. The price has risen to a higher high today of $57.43.

Comparing the JBHT and SHW charts was a difficult piece of analysis.

SHW's current leg up began Dec. 16, 2011 at $84.65 and hit a higher high today of $118.44.

Ultimately, I chose between them, based solely on the charts, on these properties:

1) JBHT has had a more recent correction and so may have more potential rise before profit-taking set in. SHW's rise has aged more. Stocks charts aren't like fine wines. Generally, in charts, the younger the better.

2) Although SHW has set higher highs yesterday and today, both days are showing decline intra-day (so far at least in today's trading). JBHT is showing an intra-day decline for today only.

3) JBHT's volume has risen with the rising price, dropping to a lower level only with today's decline. That tells me that sentiment predominates on the upside. SHW started showing declining volume four days ago, despite a rising price.

These charts are are so similar that distinguishing between the them is good exercise for chart readers.

JBHT shows return on equity of 46% but with a high level of long-term debt, amounting to 111% of equity. Institutions own 66% of shares, but the price remains relatively low. It takes $1.42 in shares to control a dollar in sales.

Earnings have grown in four of the last six quarters and was down slightly in the most recent.

Average volume is 1.1 million shares, which is liquid but not highly. The options inventory carries 12 strikes for may expiration, half of them without open interest, with strikes set at $5 intervals.

The bid/ask spread is 5.5% for the at-the-money May calls. Compare that to a 0.7% spread for the S&P 500 exchange-traded fund SPY.

Implied volatility is at 29%, near the six-month low. It has been trending sideways since mid-March. Options are pricing in a 68.2% chance that JBHT will close between $52.60 and $62.26 a month from now, an 8.4% gain or loss.

With implied volatility so low, I would want to structure my position for a net credit.

J.B. Hunt next publishes earnings on July 16. The stock goes ex-dividend in August for a quarterly payout yielding 0.98% annualized.

Decision for my account: I've opened a long vertical (bull call) spread expiring in August, short the $60 call and long the $55 call. One bonus of the current price and volatility configuration is that I was able to structure a position with a 1:1 risk/reward ratio.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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.

TITN: Farm equipment

Titan Machinery Inc. (TITN) sells farm equipment through 96 stores in the upper Midwest and Rocky Mountain region. If you're in the market for a tractor, this West Fargo, North Dakota company  is ready to step up and close the deal.

TITN had the most bullish chart among 15 stocks added to the Zacks top-buy list over the weekend. Actually, that's a bit of a mis-statement. It had the only bullish chart among the 15, which either says something about Zacks' selection methods or the state of the market.

It's hard for me to craft a backstory about Titan Machinery without using the phrase "I imagine". The agriculture sector isn't one of my strengths.

But I imagine that a lot of farming enterprises put off buying new equipment during the depths of the recession, and with the recovery taking hold, I imagine they are now starting to make those capital purchases in a context of pent-up demand.

It is the same paradigm that caused durable goods orders to rebound in February.

Certainly Titan's earnings show a pattern of decline and recovery, falling through the middle quarters of 2011 and then recovering thereafter in a series of higher earnings reports.

TITN  began its most recent leg u[p on March 8 at $23.96 and has risen with only one minor correction to Friday's high of $36.92, helped by a 15.5% opening gap following an April 11 report that showed a 59% earnings surprise.

A three-day rise added 16.4% to the gap, meaning the stock has risen nearly 32%  in less than a week.

Return on equity is 16%, but the company has achieved that at the price of heavy long-term debt, amounting to 183% of equity.

Institutions own 76% of shares, but the price is dirt cheap. It takes only 45 cents in shares to control a dollar in sales.

Average volume is 1.2 million shares. The options selection is a bit limited, even at that level, with only nine strike prices available for May, and most of those are priced at $5 increments, which is wide for a $35 stock.

Bid/ask spreads aren't cripplingly wide, although they are a bit wider than I like, and open interest is minimally acceptable near the at-the-money mark.

Implied volatility has recovered sharply from its six month lows below 45% and today stands at 51%. Options are pricing in a 68.2% chance that TITN will close between $29.91 and $40.19 a month from now, a 14.7% gain or loss.

More succinctly: This is a very volatile stock, with all the opportunities for profit and risks of pain that volatility brings.

Titan Machinery next publishes earnings on June 11.

Decision for my account: I'm passing on TITN at this point. The rapid rise of the past few days suggest to me that there will be a period of profit-taking and correction. 
Also, although the options inventory isn't horrible, it's not great, either. The wide strike intervals would make it difficult to construct a vertical spread to my liking. 


However, I think the stock is worth revisiting a week down the line to see what the price has done. A correction and reversal, or a fresh breakout above $37.92 would make a position more attractive, even with the options difficulties.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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.

May Diagonals

'Tis the season for lining up my diagonal options spreads for May. I spent 90 minutes doing the research on Saturday, with Metallica blaring in my ears. (I find that Meticallica gives an edge in trading performance.)

For most of my holdings, beginning Monday I'll roll the short options expiring in April over to May expirations. Those holdings are AAPL, DFS, INTC, QCOM, QQQ, STX and WDC.

I'll close two of my diagonals. The prices have moved in a way that make it impossible to create profitable positions with acceptable risk. So both the long calls and the shorts will be closed for EFA and IWM.

Those closures and my profits provide space for several new diagonals. As always, I'm looking at stocks having average volume of 3 million shares or more.

I'll buy the call options expiring in August, or the nearest month after that if there are no August options, selecting the strike having a delta of 70.

I'll sell the May calls having a delta between 30 and 40.

In any case, I'm looking at stocks having favorable analyst ratings and with uptrending charts, and I want the diagonal to have a risk/reward ratio of no greater than 4:1.

My short list of possibilities, based on Friday's close: LEN, LNKD, QCOM, SBUX and WFC.

After opening the diagonals, I'll immediately insure them by buying out-of-the-money puts. The question, as always, is how much insurance can I afford?

Generally, I look for a put having about a quarter of the delta of the long call and expring in the same month. The cost of insurance will generally be almost as much as my first month's income from selling a call, but since I get to sell several times and only need buy insurance once, it works out be profitable.

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: Earnings, not Econ

Retail sales, housing and industrial production are prominent in the week. Truth be told, it is the earnings releases that will dominate the markets, rather than economic releases.

The Commerce Department's retail sales report will be released at 8:30 a.m. Eastern on Monday. This is the broadest measure of retail activity and shows whether Americans are returning to the shopping aisles or continuing their course of frugality and debt reduction.

The most significant of the housing reports, existing home sales, will be out at 10 a.m. on Thursday. The housing sector has been lagging the economic recovery. An unexpectedly high number here will mean that the recovery is picking up some breadth.

Other housing reports: The Homebuilders' housing market index at 10 a.m. on Monday is a broad measure of housing activity; and housing starts at 8:30 a.m. on Tuesday tracks the beginning of new home construction -- it is a leading indicator, the builders hope, for future new home sales.

The Federal Reserve's industrial production report is scheduled for 9:15 a.m. on Tuesday. Softness here means the recovery may be failing to take hold.

The Philadelphia Fed Survey of market conditions in the mid-Atlantic region, out at 10 a.m. Thursday, is considered to be a good stand-in for the economy as a whole.

Weekly jobless claims will be released at 8:30 a.m. Thursday. This report always grabs headlines. Personally, I'm not so sure that it is of great significance to the economy and markets. I mean, anyone who is going to be laid off has already been laid off, for the most part, yes? New jobless claims at this point are hardly representative of broad trends. That's my theory, at least.

Other reports of interest:

-- Monday: The Empire State (New York) manufacturing survey at 8:30 a.m., Treasury's report tracking capital flows into and out of the country at 9 a.m., and business inventories at 10 a.m.

-- Wednesday: Petroleum inventories at 10:30 a.m.

-- Thursday: Leading indicators -- my favorite minor report -- at 10 a.m.

Two Fedsters take to the podium, both on Monday:


Cleveland Fed Pres. Sandra Pianalto, a member of the Federal Open Market Committee, speaks at 12:30 p.m. Her resume shows institutional ties early on to the U.S. House Budget Committee. After that, she rose through the Fed system.


St. Louis Fed Pres. James Bullard, an FOMC alternate, speaks at 3:30 p.m. He also is a child of the Fed.

Both took office under President George W. Bush.


Practical trading:

By my rules, as of Monday I can trade May calendar, butterfly and vertical spreads, covered calls and diagonal spreads and iron condors, and July single options and straddles. Of course, shares are good at any time.

Good trading!

DFS: Credit cards

Discover Financial Services (DFS) is a third-tier credit card company. I say "third-tier" because credit cards are like the Solar System. You have the big gas giants -- Jupiter and Saturn (Visa and Mastercard) -- and after that it's just rocks and ice and other assorted space debris, such as Earth, Mars, and the Discover and Diners Club cards.

The latter two are mainstays of the Riverwoods, Illinois company's business. But Discover is more than cards. It has a direct banking segment and operates a global credit-card payments network, PULSE.

DFS had the most bullish chart of six stocks added today to the Zacks top-buy list. I should say "re-added", because Discover Financial has been a perennial favorite for months, slipping on and off the list like a comet in the galactic clouds. (And enough with the space metaphors, already!)

I last wrote about DFS in February in an analysis that reached a positive conclusion about the company. That was at $29.35. The price has since moved to a high of $34.43 on March 23 and then dropped back in lockstep with the broad weakness in the markets.

It is presently trading at around $33, having come off of a correction low of $32.17.

DFS has been in a clear uptrend since Jan. 10, and nothing about the present correction changes that assessment.

Discover Financial has an extremely high return on equity of 30%, but with heavy long-term debt amounting to more than double equity -- a situation not uncommon in the financial sector.

Institutions own 86% of the company's shares and have bid up the price to the point where it takes $2.46 in shares to control a dollar in sales.

Although DFS lacks a commanding position in its sector, it has clearly found a business model that works. Earnings have accelerated every quarter but one since the 2nd quarter of 2010.

The company has undertaken several share buy-back programs. The most recent began last month and is scheduled to run through march 2014.

DFS is highly liquid, trading 4.9 million shares a day on average. There is an adequate selection of options with high open interest and narrow bid/ask spreads.

Implied volatility is at the bottom of its six-month range, at 29%. Options traders are pricing in a 68.2% chance that DFS will close between $30.26 and $35.74 a month from now, an 8.3% gain or loss.

Discover Financial next publishes earnings on June 21. The stock will go ex-dividend in July for a quarterly payout of 1.21% annualized.

Decision for my account: I've owned DFS since February. I'm presently playing it as a diagonal spread, long the July 29 call and short the July 33 call.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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.

ACAT: Liquid but slushy

Arctic Cat Inc. (ACAT) makes and sells snowmobiles and all-terrain vehicles. The half-century-old Thief River Falls, Minnesota company has dealerships in the United States and Canada.

It is a business that puts Arctic Cat in the want-to-have category of products, not the got-to-have. So it was hammered hard by the recession (the stock dropped to $2.40) as consumers cut back on discretionary and play-time spending. And it has recovered powerfully with the return of optimism and a growing economy.

And if things turn down again, perhaps under pressure of a renewed recession in Europe, then I would expect Arctic Cat to skid downslope dramatically.

ACAT had the most bullish chart of seven stocks added today to the Zacks top-buy list.

Its most recent leg up, from $18.99 on Dec. 26, 2011, has carried the price up to an all-time high of $44.76 on April 3. The stock has been trading in blue-sky territory since the first of the year.

On the books, Arctic Cat is a solid company with growth-stock aspirations. The return on equity is 16%, and the company has no long-term debt. Institutions own 80% of the shares but the price remains reasonable, at $1.40 in shares need to control a dollar in sales.

The company's business is seasonal, peaking in the 3rd calendar quarter (the corporate 2nd quarter). And earnings have been accelerating in that quarter since 2009, compared to the prior year.

So far, there is a lot to love about Arctic Cat, but that love starts to chill once I turn to the options list. The selection is sparse, bid/ask spreads are wide and open interest is low. I would be hard pressed to construct a viable options position on this stock, so were I to trade, it would be as shares, with no direct way to insure them through out-of-the-money puts.

Volume averages only 218,000 shares a day -- which is liquid, but slushy.

Implied volatility is high, at 76%. And that's down form the six-month peak of 85% on April 11. It is a case where the volatility really doesn't match the chart. It looks instead like something I would expect to see on a stock that has suddenly plummeted from its peaks. ACAT hasn't plummeted.

Options traders are pricing in a 68.2% chance that the price will close between $32.78 and $51.82 a month from now, a 22.5% gain or loss.

Arctic Cat next publishes earnings on May 14.

Decision for my account: I'm not trading this one because of the poor options inventory. I'm also concerned by the abnormal pattern of implied volatility in relation to the price movement. It may be OK. I just don't understand it. I like the chart and the financials. If this level of liquidity fit into my strategic mix, then I would give further thought to opening a position.


Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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.

CISG: Upside reversal

CNinsure Inc. (CISG) is an insurance services company headquartered in Guangzhou, the city which, under the name Canton, served as the Chinese gate way for Hong Kong when it was a British colony.

Insurance services means that CNinsure provides the sales for and insurance adjustors for companies that underwrite insurance policies. In addition, CNinsure owns controlling interest in several insurance underwriters.

CISG had the most interesting bull chart among 18 stocks added today to the Zacks top-buy list. I say "interesting" because on a day where everyone else is recovering anemically from yesterday's sharp price drops, CISG is experiencing a strong upside reversal at the end of a long slide.

Most of the charts I reviewed were in uptrends, but their bullishness looked quite bit like yesterday's news.

But a word of caution up front about CISG. As goes the Chinese economy, so goes CNinsure. It's markets are domestic. And the conventional wisdom on the Street is that the Chinese economy is heading toward a correction.

That's a long way of saying that today's breakout can easily become tomorrow's failure.

CISG has been on the decline for nearly two years, which two corrections slowing the fall. The most recent major leg down picked up momentum last August and in a month carried the price down from $13.10 to $6.09.

Since then, CISG has oscillated sideways between about $6 and $9, wich the most recent low happening yesterday (April 10) at $5.90.

Today the price leaped up to $6.37, or 8%, unprompted by any news. It has since pulled back as shorter-term traders take profit but remains well above yesterday's trading range.

I called the movement a reversal because the price hasn't broken past any resistance yet. The prices to watch are minor upside corrections peaking at $6.68 on March 27 and at $7.12 on March 19.

Major resistance stands at $7.45, the March 13 reversal of a sharp rise that carried the price up 24%.

The cautious trader won't give CISG a glance until the price has broken decisively above $7.45. The more aggressive trader will see the run up to resistance as a 20%+ opportunity for profit and will enter now.

The company's finances are fairly abysmal. Return on equity is a negative 15% -- that's a loss on equity.  Early reports in 2011 were positive, however, at 8% and 11%. So perhaps this is siply an anomaly. The company caries no long-term debt.

Institutions own 42% of the U.S.-traded shares. The price is has a low premium. It takes only $1.23 in shares to control a dollar in sales.

Quarterly earnings have been all over the map, without a trend.

Like many foreign companies trading as depository receipts on U.S. exchanges, CISG is not very liquid. On average 119,000 shares are traded each day.

As one would expect, CISG's options inventory is limited, with wide bid/ask spreads and low open interest. That for me means that CISG would be a shares play, with poor opportunities for insuring the position with out-of-the-money puts.

Implied volatility stands at 75%, in the mid-range of its track this year. It has been on a gentle decline since mid-March. There is a 68.2% chance that the price will close between $4.94 and $7.74 a month from now, a wide range, but that's what such high volatility means.

CNinsure will next publish earnings on May 23.

Decision for my account: The financials are horrible, and the bullishness of the chart relies on one day's price rise, hardly an unambiguous trend. It is at this point that most analysts will issue a stern warning: "This is a speculative play that carries great risks." But in my experience, that applies to any market position, no matter how "conservative". 


For my part, I want to see a trend -- no just one day -- before entering. So a higher high and higher low on Thursday, in relation to today's trading range, would increase my comfort with opening a shares position. A third high-high-higher-low day would let me label it an uptrend. Until that happens, then I'll bide my time and not open a position.


Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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.

IVZ: Investment management

One thing that has always puzzled me about the Zacks system of ranking is the number of stocks rated top buy that have fairly awful charts. Zacks is a mid-term system. The idea is that the price will rise over the next few months after a rating is issued, and the company has statistics to back that up.

Yet, as a chart-driven trader, opening a bull position on a stock with a falling price has always seemed to me as something akin to bungee jumping with a suspect cord. I may bounce up again after diving off of the  bridge, but I might not.

Since we're in the midst of a day where every stock's chart looks awful, this is an opportunity to look at a Zacks pick that normally wouldn't make the cut.

Invesco Ltd. (IVZ) manages investments globally, 60% of them retail and 37% institutional. The Atlanta, Georgia company manages, among other things, a line of mutual funds.

IVZ is the most liquid of 26 stocks added today to the Zack's top-buy list.

It's chart is certainly not the worst that I've seen, but normally I would reject it out of hand during my chart screen.

IVZ hit a peak of $26.94 on March 27, culminating a rise that began in October 2011 at $15.39. Subsequently, the price faltered and then began a rapid decline in line with the broader market, and so far today has hit a low of $24.58.

Whatever its other virtues as a trade, the price is in a downtrend, and I don't buy downtrends.

The previous correction low in the rise from October was $23.76 on March 6. A decline below that level would by definition set up IVZ for a downtrend, although it would take an upward reversal to a high below $23.76 and then a downward reversal to confirm the trend.

If the Zacks rating is indeed correct, of course, then the present decline sets up a wonderful buying opportunity that would justify opening a position upon a reversal without reference to the prior correction low.

Invesco has return on equity of 9%. This is not a hot-shot growth company by any measure. It's a tortoise, not a hare. Long-term debt is 84% of equity, a high level common to financial companies.

Institutions love IVZ. They own 86% of the shares, and have bid up the price to the point wher eit takes $2.76 in shares to control a dollar in sales.

Earnings have been fairly stable for the past five quarters, other indication that this isn't a rocket ship.

The stock is highly liquid, with average volume of 3.6 million shares.

Options have a reasonable inventory -- 14 strike prices for May -- but the open interest is severely concentrated, and most strikes have none. The bid/ask spreads are quite reasonable.

Implied volatility is above expected lows but has been steady sideways since mid-March. It stands at 28%, giving a 68.2% chance that the price will close between $22.59 and $26.61 a month from now.

Invesco next publishes earnings on April 26. The stock goes ex-dividend in May for a quarterly payout yielding 1.99% annualized.

Decision for my account: Once the price reverses, I would play IVZ as shares, in order to collect the dividend. The open-interest concentration doesn't lend itself to reasonable options plays, except for buying out-of-the-money puts as insurance on a bullish position.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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.

Bear Market?

Stocks are falling so freely that I'm having a hard time judging charts on the 26 stocks added today to the Zacks top-buy list. At this point, they're recorded losses on the day ranging up to 6.5%. Only two are showing gains.

Everything looks equally ugly. The world is dark and threatening, and there is no joy on the charts.

Amid such gloom, I have bigger fish to fry than searching for bullish charts. What sort of market are we in today? Is the bull market of the past three years over? Should I be looking for bear plays instead of the bull plays that have dominated my trading this year?

Looking at the S&P 500: The index has fallen intra-day for the past five trading days, and in relation to the prior day's close for all of those days.

The last similar losing streak occurred from Nov. 16 through Nov. 25 -- seven trading days showing intra-day losses, all also down against the prior day's close.

The November 2011 decline amounted to 7.9%, open to close, a loss of 99 points on the S&P 500. The current April decline as so far cost the market 4.1%, a loss of 58 points.

None of that, of course, says anything about the nature of the market today -- bull or bear. That is determined  by where the price stands in relation to what has come before.

The November 2011 decline, viewed on a 5-year weekly chart, is barely visible amid the powerful rise from the March 2009 recession bottom.

It reversed at a low point higher than the previous low, and so must be defined as a bull-market correction. By December the price had risen back to where the decline began.

The current April decline has brought the price down to levels last seen in early March -- not that long ago.

The previous correction low on the S&P 500's run up from last December is 1340, or 21 points below the present level. A fall below that level would set up the potential for a bearish chart.

A fully bearish configuration would require an upward reversal from below 1340, and then a downward reversal from below 1422, the prior high.

Implied volatility on the S&P 500 has -- no surprise -- taken a jump. It hit a six-month low of 14.38% on March 26, and is presently at 20.33%. that puts it at about the level it saw during a three-day minor correction in early March.

Oddly, the last similar correction -- the November 2011 downturn -- saw declines in the S&P 500's implied volatility.

Implied volatility is calculated from options prices, which in turn are determined in part by market demand. From the rising implied volatility in the current downturn, I conclude that traders are taking it more seriously.

This April downturn has more conviction than did its November 2011 cousin.

Using the April 2 high of 1422.38 as a base, implied volatility gives a 68.2% chance that the S&P 500 will close between 1382.08 and 1462.68 a month from now. Unless there is a reversal, today's close will be the first below that range since the correction began.

The current price gives a range of 1322 to 1400. Putting that in perspective: 1400 is where the S&P 500 was trading on April 5, and 1322 was touched on Feb. 2.

The bottom line for me is that I'm not willing to declare it a bear market yet. A decline below the March 6 low of 1340.03 would put me into neutral, and a reversal from a high lower than 1422.38 would turn my outlook bearish.

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.

PKT: Tools for Cloud management

Procera Networks Inc. (PKT) sells tools that enable the smart people who manage networks to do their jobs better.

For most of us, networks are a misty cloud that is somehow involved in bringing stuff to our screens when we click or tap. The reality is that the Internet and large local networks run on an immensely complicated infrastructure that requires constant monitoring and maintenance to keep running.

That's where Procera comes in. It makes the tools that the network folks use to manage the Cloud.

Procera, headquartered in Fremont, California, had the most bullish chart of 16 stocks added over the weekend to the Zacks top-buy list. 

Today is a broad down-day in the markets, an environmental fact that PKT has ignored, recording a higher high of $23.77 in an uptrend that began Jan. 11 at $14.37.

I'm partial to infrastructure companies. They lack the glitter of an Apple or Coke, but they provide basic necessities, which Apple and Coke assuredly do not (unless hipness and cavities be necessities).

The downside for some infrastructure domains, of course, is that the market can be limited. Procera sells to companies with very specialized needs. At the end of 2009 it had around 500 customers that had installed 1,300 of its systems. This is not a mass market, although the companies using Procera products may themselves serve mass markets.

PKT's current leg up is part of a broader uptrend that began in July 2010 at $4.10. That longer-term rise has been marked by three corrections, including one in 2011 that lasted for four months and carried the price down to about half the peak.

The stock is trading right below a major resistance level, at $24, set in 2008 before the price tumbled downward during the recession.

Procera has a 12% return on equity, and no long-term debt. The return is too low for a growth stock, but the lack of debt gives the company recovery powers lacking in its debt-ridden cousins.

Institutions don't have an especially strong presence in PKT, owning 57% of the shares. The price, however, is extremely high. It takes $7.73 in shares to control a dollar in sales. (By contrast, Apple's pricing is $4.62 in shares to control a dollar in sales.)

The company suffered deep loses in 2010. Since showing a profit in 2011, its earnings per share have been inconstant. There is no earnings acceleration here.

The stock, while liquid, has lower volume than I like to see, trading only 262,000 shares on average. Yet the options inventory for My has 12 strikes with strong open interest on the call side, but not for puts.

The bid/ask spread is a bit wide, but not to a ridiculous degree.

The grouping of the open interest suggests to me that there is a lot of speculative play in this issue. That's good if the price continues to rise, but it can also mean a lot quick exits if the price falters.

Implied volatility is near historic lows but is extremely high, at 58%. (Compare that to the S&P 500, where volatility stands at a mere 18%.) Again, that level of volatility suggests a lot of speculation.

Implied volatility hit a six-month low of 54% in mid-March, and has since gradually risen to the present level.

Procera next publishes earnings on May 7.

Decision for my account: Volatility is the mother of profit, so I like speculative stocks a lot. But I'm also a fan of liquidity. I want to have a good chance of getting out if things go sour. The nearby resistance level at $24, old though it might be, also causes me concern.

If I were to play PKT, it would be either as long calls (most risky) or vertical spreads (less risky), or even shares (least risky). But because of the  liquidity, the nearness of resistance and, frankly, the flakiness of the market in recent days, I'm passing on PKT. Were the price to push decisively above $24 or the market to turn unambiguously bullish, I would revisit the issue.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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: Prices

This is inflation week. Or perhaps deflation week. Or perhaps a week without any 'flation at all.

The government's price reports come in pairs, released over two days at 8:30 a.m. Eastern: The producer price report -- what the people who make the stuff you buy are paying -- on Thursday, and the consumer price report -- what you pay at the local big box store -- on Friday.

Other econ releases of note:

Wednesday: Import and export prices at 8:30 a.m., petroleum inventories at 10:30 a.m., and the Federal Reserve's Beige Book and Treasury's budget deficit, both at 2 p.m.

Thursday: Weekly jobless claims at 8:30 a.m.

Friday: Consumer sentiment from the University of Michigan at 9:55 a.m.

Practical trading:

By my rules, as of Monday I can trade May calendar, butterfly and vertical spreads, covered calls and diagonal spreads and iron condors, and July single options and straddles. Of course, shares are good at any time.

Good trading!

Strange Friday

Friday is one of those strange days on the market calendar. The markets are closed for a religious holiday, Good Friday, but the U.S. government is alive and well and pushing out econ reports.

And Friday's top econ report is a major one: The monthly employment situation report. That's jobs created and the rate of unemployment. Surefire market movers if they come in contrary to expectations.

Yet people who trade stocks and options on the U.S. exchanges will be out of luck. They'll have no way to trade on the news.

Futures traders will have 45 minutes to trade the major indexes, as laid out in this fascinating read from Bloomberg.

For the rest of us, we can either take the day off -- a rested trader is an effective trader -- or use it for study and contemplation to help ourselves hone our trading techniques and theories. One good read to digest on this idle Friday is this overview by PIMCO's Mohamed El-Erian.

A third option is to use the day for activism. Why in the world should U.S. markets close on a day when the government is open? Write the New York Stock Exchange and urge them to update their trading calendar to match today's high-velocity world.

The NYSE Euronext contact page tells where to send your emails.

Call it, Occupy Good Friday.

PIR: Conversation pieces

Pier 1 Imports Inc. (PIR) sells imported furniture and other home furnishings. It's the kind of store where the products all have an element of the outré, where you're certain that visitors will ask, "Where in the world did you find that?".

What Pier 1 sells isn't just furniture and accessories. They're conversation pieces.

The Fort Worth, Texas company operates more than a thousand stores, most in the United States but also in Canada, Mexico and El Salvador.

PIR had the most bullish chart of 17 stocks added today to the Zacks top-buy list.

The price has been in uptrend, with minor pauses and pullbacks, since bottoming a a dime in the depths of the recent recession. The long rise has brought to price to Tuesday's high of $19.09, and the trend faltered not at all during this week's broad correction.

The price is a approaching a resistance level, a correction high of around $20 set in 2004 on the stock's long decline. The all-time high of $26.44 was recorded in November, 2003.

Traders who believe in the influence of resistance levels established long ago will want to see a breakout above $20 before entering. Those who are more comfortable embracing risk will jump in down to capture that final 5% or so between the present level and resistance.

Pier 1 has a 30% return on equity, which is way high, and a very low level of long-term debt, amounting to only 3% of equity.

Annual earnings have accelerated in the peak quarters since 2010. Like most retailers, the bulk of Pier 1's business occurs in the 4th quarter, the busy holiday season.

Institutions own 86% of shares, yet the price remains quite reasonable. It takes only $1.35 in shares to control a dollar in sales.

The stock is liquid, with average volume of 1.8 million shares. The options inventory is quite good for a stock trading at that level of liquidity, but open interest is high only in the calls expiring in June.  May and September are seriously lacking.

The narrow distribution of open interest seriously impacts the strategies available to options traders. By my rules at this point long options positions must expire in July or later, which for PIR means September. But open interest around the at-the-money level ranges from one digit to the low three digits on the calls, and from zero to two digits on the puts.

 Bid/ask spreads are also a bit wider than I like.

Of course, the price, being under $20, gives lots of granularity in a shares trade. But even so, the whole situation makes it hard to construct a position to my liking. Opening a shares position is cheap, although it lacks leverage, but ensuring the position through out-of-the-money puts would be relatively expensive.

Implied volatility stands at historic lows, at 43%, giving a 68.2% chance that prices will close between $16.41 and $21.07 a month from now.

Note that "historic lows" for PIR are wildly high levels for most other equities and exchange-traded funds.

Pier 1 next publishes earnings sometime in July. Earnings published before the open today hit analysts' consensus forecast almost precisely.

Decision for my account: PIR has a wonderful chart and excellent financials. If I were willing to put my money in shares at this point, I would open a bull position in a flash. But I can profit more from options positions, and the low open interest on PIR options makes that sort of trade impossible to construct. I'm on passing PIR.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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.

BEBE: Breakout or bounce?

bebe stores inc. (BEBE) is another of those all-lower-case stores selling high-image women's apparel to a mass market.  bebe's advertising posters are among the most amusing in the business, with their mocking hint of high-drama sensuality.

The Brisbane, California company operates 312 stories, mainly in the United States but also in Canada, the Middle East and  Southeast Asia.

BEBE had the most bullish chart among 25 stocks added today to the Zacks top-buy list. On a day  marked by a broad decline in stocks, "best" also includes "how did it do today".

And BEBE did quite well. It was one of the few stocks on the Zacks list to trade within its prior day's range.

BEBE's most recent leg up began Nov. 28, 2011 at $7.02 and carried up to a high of $9.58 on March 13.

Longer term, the picture is less bullish. From its recession bottom of $4.57 in 2008, BEBE has traced a large sideways pattern ranging from about $5.50 up to between $9.50 and $10.

It is approaching the upper level for a third time, suggesting that BEBE is nearing a level where it is likely to bounce in a major downside reversal. Or, perhaps, break out beyond the prior highs in a major uptrend.

BEBE has a low return on equity -- only 3% -- but also no long-term debt.

Institutional ownership is also low -- only 42% of shares. It takes $1.53 in shares to control a dollar in sales, suggesting the stock hasn't been subject to intense buying pressure.

Volume averages only 230,000 shares, and the options inventory reflects that with a limited selection of strikes and extremely low open interest. From my standpoint, BEBE is a shares-only play.

Implied volatility has been rising since mid-March and stands at 39%, implying a 68.2% chance that the price will close between $8.35 and $10.45 a month from now.

The company next publishes earnings on May 3. Shares go ex-dividend in May or a quarterly payout on a dividend yielding 1.06% annualized.

Decision for my account: The closeness of the $9.50 to $10 resistance zone suggests that I shouldn't open a position until BEBE breaks out beyond $10. The lack of usable options and the somewhat low liquidity are also points of caution. As much as I admire bebe's posters, I'm passing on this BEBE trade.


Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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.

Thinking About Bonds

The meme of the day is that the bull market in U.S. government bonds is over. Yields are rising, which means prices will fall.

When the tectonic forces of the markets begin to move, don't run to shelter, run to the charts.

The price of 10-year U.S. Treasury notes (as tracked by their futures) began a long term rise in July 2007 from 104'190 as yields dropped sharply as a result of the Federal Reserves efforts to restart the economy.

By the price peak of 132'110 on Jan. 31 of this year, yields had fallen to levels where dividend paying stocks were considered to be a much better deal.

The most recent leg up began in July 2011 at 122'000.

Then things changed. The perception grew that a recovery of sorts was taking hold, that the Federal Open Market Committee had lost interest in further easing, that yields were about to begin climbing again.

From August 2011 the bond price began a sideways move that may be the top, as market commentary suggests, or that may be a correction on the way to further price highs and further easing.

From a chart standpoint, bonds have yet to set a lower high and lower low. Bonds remain in an uptrend from a long-term perspective. (And the long term is the best to look at bonds, which tend to have cycles running three decades or so. They aren't the sort of instrument that people like me use for short-term trading.

Even today's move didn't break the near-term trend. The 10-year T-notes were trading at 129'305 when the FOMC released minutes confirming that its members were little interested in further easing. In the ensuing 150 minutes, the price dropped to 128'245, about double the typical daily move.

Since the price peak, March 20 saw a low of 127'230. There was a bounce from that level to a lower high of 130'020. I would argue that it would take a break below 130'020 to count as a lower low and the beginning of a near-term downtrend.

Longer view, the march up to the peak had a correction to a low of 117'180 the first week in March 2011, and that price must pierce that level to count as a lower lower, which must be followed by a reversal from a lower high to count as a downtrend.

Do I deny that a bear market in bond prices is in our future? Not at all. I've stayed away from government bonds for the past few years because I thought that yields had no place to go but up, and price, down.

Is this the week the bond bear market begins? There's no way to know. A somewhat ambiguous Fed minutes release is a shaky hook upon which to hang that particular coat.

Today's price decline in the 10-year T-notes brings them down to where they were trading a week ago -- certainly not the sign of a precipitous abandonment of long-term government bonds.

For my own trading, I'm quite comfortable trading equities, but in ways that give them yield as though they were bonds. My preferred trading vehicle is covered calls and diagonal spreads, supplemented by directional plays.

I anticipate that strategy to carry me through the end of my trading days. If the long-term bond cycles continue to hold sway, we can look for yields to peak around 2042.



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.

USB: Beyond regional banking

U.S. Bancorp (USB) runs the fifth largest commercial bank in the United States. The Minneapolis, Minnesota company operates in 25 states.

It is a fairly recent agglomeration, having been put together in the 1990s out of several regional banks in the West and Midwest.

In some ways, USB still looks something like a regional bank that has burst its boundaries and moved beyond its origins. I read that as meaning there will be more energy and attraction to growth for USB than with its bigger, more national cousins, such as Bank of America or Wells Fargo.

U.S. Bancorp had one of the most bullish charts out of 32 stocks added today to the Zacks top-buy list. There were three other stocks in the final four, some with better charts, but their options inventories were marred by wide bid/ask spreads and poor selection.

USB's most recent leg up began Oct. 4, 2011 at $22.26. It hasn't been a straight run. The chart shows four corrections, with the last one still in effect.

The final leg within the leg (the toe?) began March 7 at $28.35 and carried the price up to $32.23 on March 26.

From a chart perspective, USB's virtues as a buy depends upon what sort of correction it is in. A downward move suggests the prudent trader will wait for a bounce. A sideways correction allow more leeway for entry now.

By my count this is the 14th day of the current correction, and it looks to me like a sidewinder. For 10 of those days, the intra-day moves have been confined between $31 and $32. Breakouts have been swiftly followed by retracements.

I'm a fan of breakouts. If I can find a good breakout to play, I'll generally take it with a smile. In the case of USB, the upper extremes of the present correction are $32.23 and $31.89. I would consider playing on speculation if the price breaks above $31.89 on higher volume, and would do so with even greater confidence on a break above $32.23.

The correction period included the stock going ex-dividend on a quarterly payout worth 19.5 cents, which has a depressing effect on the price.

A more aggressive way of playing the chart would be open a short vertical options spread (bull put spread), which gains value with the passage of time. That means I have a profitable trade if the price continues sideways and if it rises. Only a downtrending correction is loss-making under that sort of position.

U.S. Bancorp's return on equity is 16%, and debt is at the high level common to banking, amounting to 184% of equity.

Institutions own 69% of shares -- not a particularly high level -- but the price has been bid up to where it takes $3.20 in stock to control a dollar in sales, making USB a fairly expensive stock.

USB is a highly liquid stock, with average volume of 11.1 million shares. There is a good selection of options, although open interest trails off quickly as the strike moves away from the at-the-money level.

U.S. Bancorp next publishes earnings on May 17. The stock goes ex-dividend sometime in June for a quarterly payout yielding 2.48% annualized.

Implied volatility is at historic lows, at 26%. Options are pricing in a 68.2% chance that the price will close between $29.05 and $33.79.

Decision for my account: A short vertical spread means that I'm selling volatility. Implied volatility for USB is extremely low. A short position would amount to selling low and buying high if volatility should rise. So I'm rejecting the short vertical spread position. I'll consider a long position upon breakout above $32.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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.

UA: New tech skin touch

Under Armour Inc. (UA) makes underwear and sportswear with the emphasis on new-tech fabrics that control airflow and moisture. The Baltimore, Maryland company makes the most intimate and mundane of clothing items, but with a decidedly 21st century twist.

Its market is dominated by North America, although it does have some sales in Europe and East Asia, last year opening its first store in China.

I use Under Armour products. It turns out that airflow and moisture control are important not only to young athletes, but to active old people as well. That gives Under Armour's new-tech approach to skin-touching clothing a very broad market indeed.

Under Armour had one of the most bullish charts among 25 stocks added over the weekend to the Zacks top-buy list. The final four were all more or less equally bullish. What recommended UA was a good selection of options with high open interest.

UA began its most recent leg up at $72.31 on Jan. 5, rising to an all-time high of $99.35 on  March 26 before faltering. The correction carried the price down to a low of $91.65 on March 29, and the price has since bounced off of that low up to a high today (so far) of $96.46.

The cautious trader will wait for a break above that prior high ($99.35) before opening a position; the speculator will enter on the basis of today's upside moment, the first intraday rise since the correction began.

UA shows a return on equity of 17%. The company carries long-term debt equal to 12% of equity, which is quite low. Basically, UA isn't a growth stock but could be if it brought its return on equity up to 20%.

Institutions are treating as an up and coming stock. They own 83% of shares, and they have bid the price up so that it takes $3.32 in shares to control a dollar in sales.

Quarterly earnings show a seasonal pattern, with the third quarter being the peak. Q3 earnings have risen steadily in that quarter on a year-over-year basis.

UA's average volume is 683,000 shares. Next earnings will be published on April 30. As I mentioned above, there is an excellent selection of options, with good open interest and bid/ask spreads that are on the narrow side for a stock trading less than a million shares a day.

Implied volatility has been rising since mid-March, although, at 36%,  it still stands at historically low levels. Even so, that is well off the lowest low of 31%. Options pricing suggests that there is a 68.2% chance that the price will close between $86.25 and $106.35 a month from now.

Decision for my account: I like the chart, financials and story -- and the options are OK. The biggest question is whether to play the options long, because of rising volatility, or short, because I expect volatility to fall.  


I'm opting for short because I expect the price to rise, which means falling implied volatility. I'm breaking my rules and going for an April bull put spread. The credit difference between April and the by-the-book month of May is quite small.


I've opened a net-credit bull put spread for April expiration, short the $95 strike and long the $92.5 strike.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

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

The week culminates with the March jobs report, a key measure for the politics of economic recovery. The report will be released at 8:30 a.m. on Friday.


It doesn't necessarily measure the strength of the future recovery or even whether the economy will  be recovering in April -- hiring of people for jobs is the caboose of the economic cycle. It does measure the degree of pain people are feeling and therefore how prominently economic issues will influence this year's elections.


Two reports will be released during the week that are treated as previews of the main event: The ADP employment report, from the payroll management company, at 8:15 a.m. on Wednesday and weekly jobless claims at 8:30 a.m. on Thursday.


Day by day:


Monday: The Institute of Supply Management manufacturing index and construction spending, both at 10 a.m.


Tuesday: Minutes of the last Federal Open Market Committee meeting at 2 p.m., following factory orders at 10 a.m. and automotive sales throughout the day.


Wednesday, the Institute of Supply Management's non-manufacturing report at 10 .m., and petroleum inventories at 10:30 a.m.


Thursday and Friday are covered  by my discussion of the jobs report, above.


Two members of the Federal Open Market Committee -- Cleveland Fed Pres. Sandra Pianalto and San Francisco Fed Pres. John Williams -- have scheduled public appearances during the week. If they should express an opinion about the course of the economy, remember that they have power to influence it.


Pianalto, who worked for the House Budget Committee before beginning her rise through the Federal Reserve staff, speaks Monday at 12:35 p.m.


Williams is also a child of the Fed. He speaks Tuesday at 4:05 p.m. and Wednesday at 11 a.m.


FOMC alternate John Bullard, who rose through the Fed staff to become president of the St. Louis federal reserve bank, speaks Monday at 10 a.m. and Thursday at 9:10 a.m. 


Pianalto took office under President Obama; Williams and Bullard, under President George W. Bush.


Practical trading:



By my rules, as of Monday I can trade May calendar and vertical spreads, and July single options and straddles. Of course, shares are good at any time.

Good trading!