SEP: Confused lemming

Update 7/16/2013: SEP reversed course on the 11th day of a sideways pattern and pierced the lower boundary of its 10-day price channel, giving an exit signal. My position was structured as long shares and I exited the day the signal was given for a 6.7% profit over an average holding period of 31 days. The annualized yield was 79.3%. 

Spectra Energy (SEP), in sending a bull signal, is confused lemming. While the crowd was, seemingly, preparing to rush for the exits, and as other energy stocks were already stumbling through the doorway, SEP calmly headed to the refreshments table for a cup of punch and a plate of pastries.

In this period of growing expectation that the Federal Reserve, to guard against inflation, may be preparing to close down the party, SEP's main attraction is that has correlated very poorly with the S&P 500 of late, and so seems to be an unlikely candidate to follow the other lemmings off the cliff. Although SEP one of the 500 stocks in the index, its 52-week correlation stands at negative 39 and has been falling since the start of April. (On the correlation scale, a 1 is moving in lockstep with the S&P 500 and -1 is moving exactly to the contrary.)

SEP's breakout came on the sixth day of a march to the upside that has carried the price to $41.09 (so far) its highest high of the past 20 years, eclipsing the prior high set on April 1. Today's high marked a way-station in a fairly steady rise from $27.15 in November 2012 up to  $40.08 last March, which was followed by a correction that hit bottom at $34.42 on June 4 before embarking on its rapid rise.

This is the second bull signal since the most recent leg up began last autumn. The one completed signal yielded 20.8% in a 70-day lifespan. Since the prior major low, in August 2011, the stock has completed five breakouts to the upside, all of them profitable, with a 4.1% average yield over an average lifespan of 38 days.

If I had no collateral information about the mood of the market and the state of the economy, my greatest concern about SEP would be that it had gone too far too fast. However, I've never found that to be an entirely persuasive argument. It seems like trying to guess how high up is; all I can do is point dumbly.

SEP was one of six symbols to survive my initial screening. (See "Thursday's Prospects" posted last night.)

Of the other bull breakouts, SCSS is in a downtrend, GBCI had unprofitable historical odds and PTNR had lower liquidity than SEP has.

Of the bear breakouts, MCP's near-term chart is arguably a correction with an uptrend (but it's ambiguous),  NFX has unprofitable odds and CCJ, while profitable, has shown low yields.

Spectra Energy, headquartered in Houston, Texas, transports natural gas, operating 3,200 miles of pipeline in the southeastern United States, in addition to storage facilities able to hold 57 billion cubic feet of gas.

The analysts following the stock are universally unenthusiastic about its prospects. Seriously so. Their enthusiasm rating stands at negative 100%.

That's hard to understand, given Spectra Energy's financials. The company reports return on equity of 12% with long-term debt amounting to 41% of equity. The debt is higher than I like but is far below crippling levels.

Looking at the last 12 quarters; Spectra has been profitable in each. The most profitable quarter, the 1st, has declined twice in this period from the year-ago quarter. Earnings have surprised to the upside seven times and to the downside, five.

Institutional ownership is quite low, at 29%, and the price is quite high, bid up to the point where it takes $18.43 to shares to control a dollar in sales.

Overall, Spectra's financials are a paradox: Analysts dislike it but the returns are good and the price stands at a level indicative of speculative excess. Here again, Spectra is running counter to the other lemmings.

SEP on average trades 259,000 shares a day, a level of liquidity that supports only a narrow selection of option strike prices and with low open interest. The front-month, at-the-money calls have a 23% bid/ask spread, which is quite wide.

I won't trade these options. The liquidity is low and the spread is way too high for my tastes. So if I open a position on SEP, it will be a shares. That costs me leverage and the chance to hedge the position.

But I'm having a difficult time finding trades in this environment, and while I'm always happy to not trade when the times aren't right, I'm more amenable to a shares deal if a decent options play isn't on the table.

Implied volatility stands at 21%, at the middle of the six-month rang. It has been zig-zagging lower for the past week. Options are pricing confidence that 68.2% of shares will fall between $38.49 and $43.49 over the next month, for a potential gain or loss of 6.1%, and between $39.79 and $42.19 over the next week.

Options trading is quite active today on both the upside and the down, with call running at 71% above their five-day average volume, and puts at 89% above volume.

The fair-price zone on today's 30-minute chart runs from $40.03 to $40.85, encompassing 68.2% of transactions surrounding the most-traded price, $40.43. SEP opened near the bottom of the zone, dropped below it in the first half hour of trading, and is trading above the zone with two hours to go before the closing bell.

Spectra next publishes earnings on July 29. The stock goes ex-dividend in August for a quarterly payout yielding 4.92% annualized at today's prices.

Decision for my account: I've opened a bull position in SEP, structuring it as long shares. My sizing rules are the same for shares as for option spreads -- I the unit size according to my trading rules, without any adjustment for the leverage shares lack compared to options.

References
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

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.

Thursday's Prospects

On Wednesday, June 12:

Of 2,320 stocks and exchange-traded funds in this week's analytical universe, 91 that are traded on the major American stock exchanges broke beyond their 20-day price channels, seven to the upside and 84 to the downside.

In addition, six that are traded over the counter broke out, all to the downside.

Within my analytical universe, 4.2% of symbols gave bull or bear signals, up from 2.5% the prior trading day.

The ratio of bull to bear signals is 1:13, compared to 1:6 the prior trading day, a strengthening bearish bias.

Seven of the major-exchange symbols survived my initial screening, four having broken out to the upside and three to the downside. The upside symbols are GBCI, PTNR, SCSS and SEP. The downside symbols are CCJ, MCP and NFX.

None of the over-the-counter symbols survived my initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Thursday, June 13.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for...

• the odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
• a yield adjusted by those odds of 5% or greater,
• and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options whatever their open interest or sufficient volume to allow for the short sale of shares.

My cut-off point for bullish bias is a ratio of bull to bear signals of 2:1 or greater, and for bearish bias, 1:2 or smaller, rounded to the nearest whole number.

QLIK Closed

I've exited my bull position in QLIK for a loss and updated my entry post, "QLIK: Data for decisions", with details.

References
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

NRG Closed

I've exited my bear position in NRG for a loss and updated my entry posting, "NRG: Electric bear play", with details.

References
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

TSO Closed

I've closed my bull position in TSO for a profit and updated my entry post, "TSO: Refinery bull signal", with details.

References
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

MT: Stock Descending a Staircase

Update 7/9/2013: MT broke above its 10-day price channel today and I've closed my bear position in MT for a 3.1% profit in the price of the stock. I structured my position as short vertical option spreads, which produced a 19.4% yield on risk. The options were rolled once during the period I held them.

ArcelorMittal (MT) has been plummeting for a very long time. It peaked at $49.41 in January 2010, and  since then the chart has been a continuing riff on "Nude Descending a Staircase" that would have made Marcel Duchamp proud.

Stripped of its bullish creds (such as they were), MT hit a swing low of $11.15 on April 18, recovered to $13.43 on May 10, and then resumed its descent, breaking below the 20-day price channel on Tuesday and confirming the bear signal today.

If a stock must decline, it should certainly do so with panache, and that goal MT has fulfilled.

Since the most recent leg of the downtrend began  in January, MT has broken out to the downside once, for a 23% yield on a position lasting 58 days.

Since the last major high in May 2011, MT has completed seven bear signals, for an average yield of 7.9% and an average trade duration of 33 days.

This is a bear chart to be proud of.

MT was one of six symbols to survive my initial screening. (See "Wednesday's Prospects" for details.)

Of the two upside breakouts, CI failed confirmation and NFP had a weekly chart containing several huge gaps that was just a bit too prone to surprises for my taste.

Of the remaining downside breakouts, the yield on FFIV's completed signals were lower than what MT provided, MSTR confirmed its breakout but with little conviction, and POWI had insufficient liquidity to support a bear trade, either with options or a short sale of shares.

ArcelorMittal is a multinational steel and iron company based in Luxembourg with an operational headquarters in London and production locations on every continent except Australia and Antarctica. It works in a competitive field, especially in light of China's growing steel industry, and as a raw materials company was hit quite hard by the Great Recession.

Long term, I'd argue that for a multinat of ArcelorMittal's size, the harder the fall, the more spectacular the recovery. But that's long term. Not my playing field.

MT is followed by only a handful of analysts, who collectively give it a 17% enthusiasm index.  That must be based on hope for the future, because the company reports a return on equity of negative 4%, a loss. Debt isn't at a crippling level, but 40% of equity is high enough to impact any recovery plans the company pay have in the pipeline.

ArcelorMittal has reported losses in five of the last 12 quarters, including all of the last three. It has surprised to the upside four times, and to the downside, seven.

Institutions own a mere 3% of shares, and the price is extremely low. It takes only 25 cents in shares to control a dollar in sales.

MT on average trades 5.4 million shares a day, sufficient to support a moderate supply of option strike prices with three- and four-figure open interest. Front-month at-the-money puts have a 1.7% bid/ask spread.

Implied volatility is running at 40%, near the middle of the six-month range. It has been tracking sideways since mid-May.

Options are pricing in confidence that 68.2% of trades will fall between $10.48 and $13.20 over the next month, for a potential gain or loss of 11.5%, and between $11.19 and $12.49 over the next week.

Today's option trading is running heavily toward puts, whose volume is double the 5-day average. Call volume is running at 93% of the average.

The fair-price zone on today's 30-minute chart runs from $11.83 to $11.98, encompassing 68.2% of transactions surrounding the most-traded price, $11.96. The price opened today above the zone but swiftly dropped to the zone floor before bouncing up slightly in the past hour, with two hours to go before the closing bell.

ArcelorMittal next publishes earnings on July 29. The stock goes ex-dividend in August for a quarterly payout yielding 6.75% annualized at today's prices.

Decision for my account: I love the chart, but the low price of the stock, below $12, makes it somewhat difficult to construct a hedged position built from short vertical option spreads. It simply takes a lot of contracts in order to fill the unit, which is nearly double my base amount. 

I did a 10-contract test order, and it filled immediately above the bid but below the ask, which I'll take. A bit later I rounded out the unit with one further order, with also filled immediately.

My post from yesterday, "Position Sizing: The big and the small", discusses the issues associated with hedging low and high priced stocks. MT's price is far from the real extremes, but I can start to see some of the issues appearing even at a $12 price tag.

I've structured the position as a bear call spread expiring in July, short the $12 calls and long the $13 calls. The spread has a potential maximum yield at expiration of 38.9%  and provides a 3% cushion of profitability above the entry price of the stock.

References
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

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.

Wednesday's Prospects

On Tuesday, June 11:

Of 2,320 stocks and exchange-traded funds in this week's analytical universe, 51 that are traded on the major American stock exchanges broke beyond their 20-day price channels, six to the upside and 45 to the downside.

In addition, eight that are traded over the counter broke out, two to the upside and six to the downside.

Within my analytical universe, 2.5% of symbols gave bull or bear signals, up from 1.1% the prior trading day.

The ratio of bull to bear signals is 1:6, compared to 1:1 the prior trading day, showing that the market switched to a bearish bias.

Six of the major-exchange symbols survived my initial screening, two having broken out to the upside and four to the downside. The upside symbols are CI and NFP. The downside symbols are FFIV, MSTR, MT and POWI.

None of the over-the-counter symbols survived my initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Wednesday, June 12.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for...

• the odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
• a yield adjusted by those odds of 5% or greater,
• and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options whatever their open interest or sufficient volume to allow for the short sale of shares.

My cut-off point for bullish bias is a ratio of bull to bear signals of 2:1 or greater, and for bearish bias, 1:2 or smaller, rounded to the nearest whole number.

Position Sizing: The big and the small

In my book, position sizing is the most important part of trading. To trade is to gamble, and sizing controls the gambler's natural instinct to shove all the chips on to a single lucky number before the wheel is spun.

Trade sizing is addressed high up in my Trading Rules (available here as a Google doc):

Each initial position is one unit valued at one-hundredth (1%) of capital designated for this strategy divided by the 20-day Wilder average true range (ATR), with all values rounded down if needed. Each position is limited to four units

But sometimes, the rules don't work.

At very high or very low prices, the ATR sizing method breaks down. Either the size of the unit is ridiculously small in comparison with the huge share price, making a trade within the rules impossible. Or the unit will allow a ridiculously high number of low-priced shares, and so also not can't be traded because of insufficient liquidity in the market.

This method of adjusting the unit size for the volatility of the stock is derived from the original Turtle Trading method of the 1980s and was a simple way to make the calculation back in the days when the combination of computing power and networking that traders rely on today simply didn't exist .

These two examples assume a relatively well-to-do retail trader who has managed with, say, $100,000 in trading funds. Definitely not in Occupy's 1%, but not in Mitt Romney 47%, either. Those funds mean that the base size of one unit is $1,000.

1) Apple Inc. (AAPL) closed today at $437.60, with an ATR of 11.02. Dividing $1,000 by the ATR gives a unit size of  $90.74, or about 1/20th of a single share.

2) Rainmaker Systems Inc. (RMKR) closed at 43 cents, with an ATR of 0.04, for a unit size of $25,000, or 58,139 shares, nearly 70% of the average daily volume.

One way around the problem with high-priced stocks is to trade option spreads instead. I trade short vertical spreads typically and determine the unit size by dividing the maximum loss on the spread by the ATR. Since options are leveraged, the unit size will work out at levels where the stock price is too high to trade.

However, that won't work with a price as high as AAPL's, where the unit size is still too small. It also won't work with the low-priced symbols, which generally lack options.

My second method, for high-priced stocks, is to treat my single entry transaction as four units, the maximum I allow myself, and to forego adding to the position if the it moves in my direction. That means I can do a trade that's four times riskier than the rules would allow.

For low-priced stocks, I define my entries in terms of fractions of a single unit and increase the number of times I can add to the position. Normally, it's four times, but if in the case of RMKR I defined a unit as $1,290, or 3,000 shares, then I could add nearly 20 times, if the chart supported such action.

(See the "Additions" section in my rules for details on when I add to positions.)

My third method is to, well, cheat. If I like a stock a lot and the best I can do on the unit is 0.45, then I'll cross my fingers and open the position. Or the stock is priced so low that there's no reasonable addition limit, then I'll wing it. I really don't like to break sizing rules, but ultimately, I hate losing an opportunity even more.

I'm considering replacing the ATR in my rules by some other method of adjusting for volatility, either the beta or a combination of implied volatility on optionable stocks and beta on the others, but I need to do some testing before making a decision. Meanwhile, nearly all the stocks that come up on my radar are within reach of most traders.

References
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

A tale of two rolls

Rolling is what happens to options positions after they expire without an exit signal on the stock. It's how I keep my hedged/leveraged positions alive. I almost always structure them as short vertical spreads -- bull put spread or bear call spreads -- that expire within 20 to 40 days of entry.

I've updated my Trading Rules with a section on Rolls. It's near the end. The Rules, as a Google doc, can be read here.

The new section says:

A hedged position consisting of options (such as short vertical spreads) may be rolled into a new positions upon the profitable expiration of an old one if the stock price is trading beyond the 20-day price channel boundary as it was at expiration (the 20-day expiration channel). All units held in the old position may be rolled into the new one in a single order.

If the stock is trading within the expiration channel, then the roll must be delayed until the price breaks anew beyond the expiration channel. All units can be rolled upon the break beyond the 20-day expiration channel, no matter how long the delay has been.

If during the delay the price moves beyond the 10-day expiration channel, an exit signal is given and the position may not be rolled. Instead, the symbol can be traded again only upon the occurrence of a new entry signal according to the rules given in this document.

The difference in the two cases is whether an exit signal has occurred. With an exit signal, all units can be rolled forward immediately. Without a signal, then everything is reset and any further breakout results in a new position opened at one unit.

I opened a position in SBUX yesterday. My vertical spread position expired profitably on May 17, but the price declined and didn't close above the 20-day price channel at that time. It subsequently dropped and on June 5 closed below the 10-day price channel, generating an exit signal. The breakout above the 20-day price channel on June 7 meant that I entered SBUX as a new position, at one unit. My entry write-up can be read here.

I opened a position in QIHU today. Like SBUX, my QIHU vertical spread position expired profitably in May, and the price dropped. However, in QIHU's case, the stock continued to trade within the 10-day price channel. It never dropped below the lower boundary. So when it broke above the 20-day price channel at the time of the May expiration, then I entered by opening a July options position consisting of four units, the number I had held in May. It's a roll with a gap of three weeks (plus change) that entirely skipped over the June options. (April's entry write-up on QIHU is here.)

Hedged positions introduce a degree of complexity unknown to the original group of Turtle traders, the people who in the 1980s implemented the strategy that forms the basis of my own trading rules. (The original rules can be read here. They were formulated by the Chicago commodities trader Richard Denis.)

Yet complexity, as long as the trader follows a set of rules that cover the universe of possible occurrences, is no barrier to profit.

References
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Tuesday: No Trade

The four survivors of last nights initial screening confirmed their bull signals today but were knocked off my list in the secondary round of screening because of liquidity. (See "Tuesday's Prospects" for details of the initial screening.)

ATHN, BWLD, CLW and ICUI lack sufficient open interest on their options for me to create a hedged position. In each case, the breakout comes within an uptrend on the weekly chart, so each meets my preference for following trends rather than trading to the contrary side.

They would be worth further analysis with an eye toward a position made up of long shares. However, at this point I'm looking for the hedging and leveraging capabilities that options give me.

So, I won't be opening any new positions today.

References
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Tuesday's Prospects

On Monday, June 10:

Of 2,320 stocks and exchange-traded funds in this week's analytical universe, 22 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 11 in each direction.

In addition, three that are traded over the counter broke out, one to the upside and two to the downside.

Within my analytical universe, 1.1% of symbols gave bull or bear signals, down from 1.5% the prior trading day.

The ratio of bull to bear signals is 1:1, compared to 3:1 the prior trading day, showing that the market switched to a neutral bias.

Four of the major-exchange symbols survived my initial screening, all having broken out to the upside. They are BWLD, ATHN, CLW and ICUI.

None of the over-the-counter symbols survived my initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Tuesday, June 11.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for...

• the odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
• a yield adjusted by those odds of 5% or greater,
• and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options whatever their open interest or sufficient volume to allow for the short sale of shares.

My cut-off point for bullish bias is a ratio of bull to bear signals of 2:1 or greater, and for bearish bias, 1:2 or smaller, rounded to the nearest whole number.

SBUX: Bull-Bear tag team

Update 7/24/2013: SBUX pierced the lower boundary of it's 10-day price channel, bringing this bear position to a close. Actually, the position was closed July 10 with the intent to roll when it broke above its 20-day price channel. It did break out on July 5, confirmed on July 6, but I failed to make the trade amid preparations for an overseas trip. 

Sometimes trading errors are fortuitous blessings. From the missed roll's breakout level, SBUX rose 3.3% in six trading days, and then began the decline that triggered the close signal at $67.45, a 0.3% loss unhedged and a bigger one with the hedged position I would have opened.

SBUX shares lost 0.2% during the average of 17 days I held the position. I structured the position as short vertical spreads. The options produced a 31.1% profit.

Starbucks Corp. (SBUX) was among nine positions that I exited on Friday under my rules. The price had closed below the 10-day price channel on Wednesday. (See "How I exit hedged positions" for details of how I handle such things.)

The exit produced a 3.3% gain on the share price and a 16.% gain on my hedged position, which was built from vertical option spreads sold for credit.

I've long said that I have no idea which way the market will move, and SBUX acknowledged the accuracy of that sentiment by closing on Friday above the 20-day price channel, sending a bull signal that was confirmed in trading today.

I mean, two days after an exit signal got me out, SBUX roared bag with an entry signal to the upside. It's a classic Bull/Bear tag team straight out of the American pro wrestling circuit.

If I open a new position, it essentially will convert Friday's exit into a roll of the position that was executed a week earlier than anticipated.

But let's not rush in. The questions I have to ask are, Do I still like SBUX as a bull play? And do I treat it as a roll or as a new bull play? The answer to the latter determines how many units -- options spreads in this case -- should I buy upon entry. If it is a new bull play, the answer is one. If a roll, the answer is four, since I was fully invested under my rules.

SBUX has been in an uptrend since -- well, really big picture, since 1995. The massive price collapse of 2006-2008 ended above the previous major correction low, keeping the trend intact. 

The most recent leg up began in August 2012, and since then SBUX has broken out to the upside four times. The three completed bull signals were all profitable, an average yield of 5.4% on trades that, on average, lasted 55 days before concluding with an exit signal.

Today's breakout  carried the price to a new all-time high of (so far) $66.29.

SBUX was one of seven symbols that survived my initial screening after Friday's session. (See my weekend post "Monday's Prospects" for details.) Of those seven, three failed confirmation today by retreating back within their price channels: GPS, BEAV and SAM. 

Of those remaining, AMZN has had no profitable breakouts to the upside within its current trend, COO has insufficient open interest on options to meet my criteria, and XEC's breakout to the upside runs counter to its present downtrend.

Analysts have sufficient love for SBUX to give it a 32% enthusiasm rating, and like most love in the markets, their's is based on a proven ability to make money. Starbucks reports return on equity of 28% with low debt amounting to 10% of equity. This makes SBUX a growth stock by my definition.

As I look at the last 12 quarters, I find that Starbucks has been profitable in each. The peak profit quarter each year is the 1st, and that quarter in 2013 was higher than its year-ago counterpart, and the same is true for 2012. Earnings have surprised to the upside 10 times and to the downside, twice.

Institutions own 72% of shares -- a bit on the lowside for such a dynamic, big-name brand -- and the price has been bid up to a high level. It takes $3.47 in shares to control a dollar in sales.

SBUX on average trades 4.7 million shares a day, sufficient to support a fine selection of option strike prices with open interest in the four figures. The front-month, at-the-money bid/ask spread on calls is quite narrow, a 1.2%.

Implied volatility stands at 23%, in the lower half of the six-month range. It has been stair-stepping in a shallow uptrend since mid-May.

Options are pricing in confidence that 68.2% of trades will fall between $61.68 and $70.60 over the month, for a possible gain or loss of 6.8%, and between $64 and $68.28 over the next week.

Trading in options today is running at a rapid clip, with call volume running triple the five-day average, and put volume at twice the average.

The fair-price zone on today's 30-minute chart runs from $65.61 to $66.07, encompassing 68.2% of transactions surrounding the most-traded price, $65.89. SBUX opened at the bottom of the zone and moved decisively above it in the third hour of trading.

Starbucks next publishes earnings on July 25. The stock goes ex-dividend in August for a quarterly payout yielding 1.27% annualized at current prices.

Decision for my account: I have opened a bull position in SBUX, structuring it as vertical option spreads expiring in July, sold for net credit, short the $65 put and long the $62.50 put. This structure will produce a profit at expiration even if the stock falls by 2.9%, and it has a potential maximum yield at expiration of 21%.

I decided to treat the entry as a new trade of one unit rather than a roll of four units (see graf 6 above for a discussion of what that means). SBUX did, after all, fall below the 10-day price channel, sending an exit signal under my rules. If I'm not a strict constructionist about such things, then the rules have no meaning, and my trading will descend to the level described by Alexander Pope:

Thy hand, great Anarch! lets the curtain fall,

And universal darkness buries all.

-- The Dunciad (1728)

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

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: Retail, Prices, Industry

Three major reports clustered at the end of the week will provide focus for traders.

The government's retail sales report, which is more comprehensive than the weekly private reports, will be issued at 8:30 a.m. New York time on Thursday. The producer price index follows on Friday at 8:30 a.m. And industrial production caps the week at 9:15 a.m.

All are trailing indicators, yet all are important measures of the pace of the economic recovery, which in turn helps determine when the Fed will yank away the punch bowl and send the party-goers packing.

Leading indicators (in descending order of importance):

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

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

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

Average weekly initial jobless claims, at 8:30 a.m. Thursday.

The index of consumer expectations from the Reuters/University of Michigan consumer sentiment survey, at 9:55 a.m. Friday.

Other reports of interest:

Wednesday: Petroleum inventories at 10:30 a.m. and the Treasury budget, which tracks the federal deficit, at 2 p.m.

Thursday: Import/export prices at 8:30 a.m. and business inventories at 10 a.m.

I also follow the Baltic dry index, released daily, tracking the volume of global maritime shipments of coal, iron ore, grain and other raw materials.

Fedsters

One member of the Federal Open Market Committee will speak: St. Louis Fed Pres. James Bullard on Monday.

Analytical universe

This week I'll be analyzing new bull and bear signals among 2,320 stocks and exchange-traded funds that have some analyst interest. They are traded both on the major U.S. exchanges and over-the-counter. My universe is selected from mid-cap stocks and larger, defined as market capitalization of $1 billion and greater.

Trading calendar

By my rules, I'm trading July options for short vertical  spreads and the short legs of covered calls, iron condors, and calendar, diagonal and butterfly spreads, as well as September options for single calls and puts. Of course, shares are good at any time.

Good trading!

Monday's Prospects

On Friday, June 7:

Of 2,320 stocks and exchange-traded funds in this week's analytical universe, 32 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 25 to the upside and seven to the downside.

In addition, three that are traded over the counter broke out, one to the upside and two to the downside.

Within my analytical universe, 1.5% of symbols gave bull or bear signals, down from 1.7% the prior trading day.

The ratio of bull to bear signals is 3:1, compared to 1:9 the prior trading day, showing that the market switched to a bullish bias.

Seven of the major-exchange symbols survived my initial screening, all having broken out to the upside. They are AMZN, BEAV, COO, GPS, SAM, SBUX and XEC.

None of the over-the-counter symbols survived my initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Monday, June 10.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for...

• the odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
• a yield adjusted by those odds of 5% or greater,
• and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options whatever their open interest or sufficient volume to allow for the short sale of shares.

My cut-off point for bullish bias is a ratio of bull to bear signals of 2:1 or greater, and for bearish bias, 1:2 or smaller, rounded to the nearest whole number.

DHR Closed

And a ninth position closure for the day: DHR, for a loss.

I've updated my initial entry posting: "DHR: Tech tools bull signal".

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Friday: No Trade

My initial screening last night (see "Friday's Prospects") turned up two potential trades, neither producing a great deal of excitement.

IPGP's bull signal was confirmed, but it comes within a slight uptrend that in turn is a correction of prior uptrend. After hitting a correction peak in February and withdrawing a swing low, it has since produced a series of lower highs and lows.

The present breakout moved to a higher high within the downtrend that began in February, but I would want to see the price close above that February high, $70.11, before I'm convinced that IPGP is actually embarking on a new uptrend.

 SD confirmed its bear signal. Price is the problem here. It trades for a few cents under $5, and I find option pricing on such low priced symbols to be difficult to work with.

There's also a macro reason to stand back. This is the 12th trading day of the S&P 500 downtrend that began May 22. It's also the second reversal to the upside, and it looks suspiciously similar to the first, on May 28.

That May 28 reversal proved to be a one-day wonder that moved high, then retreated and closed well below its high, and the next day the downtrend continued.

I won't be opening any new positions today.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

NSC Closed

NSC is the eighth exit of the day (read about the other seven exits here), for a fairly nasty loss.

I've updated my entry posting, "NSC: Bull chart, bad gossip", with details. References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Seven positions closed

Today's reversal to the upside in the broad markets gave me an opportunity to close seven positions that had given exit signals in the past week or so.

Four positions showed a profit: BIIB, GOOG, SBUX and XHB. Three showed a loss: CP, HAL and PSX.

The way I trade, a signal means that I exit a shares position immediately, but getting out of hedged positions built from options requires a more tactical approach. (See my recent posting "How I exit hedged positions".)

I've updated the initial entry postings on six of the positions with outcomes of the trade, both the change in the stock price and my return on risk for the hedged positions.

• "BIIB: A biotech bull"
• "CP: A railroad bull play"
• "GOOG: First bull signal since January"
• "HAL: Bull play in oil services"
• "PSX: Bull signal on downstream petrochemicals"
• "XHB: A homebuilders bull play"

In addition, I also closed my SBUX position. For some reason I entered that position without posting an analysis; perhaps the position was was grandfathered after I entered using different trading rules. Here's the outcome:

SBUX gave an exit signal on June 5 and I closed the position on June 7. Shares gained 8.5% during the period I held the position. I rolled the position once and added to it several times. The share gain from my basis was 3.3%. I structured the position as vertical credit option spreads, which produced a 16.4% gain on risk.

Two positions have given exit signals but remain open: TSO and WY.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Friday's Prospects

On Thursday, June 6:

Of 2,309 stocks and exchange-traded funds in this week's analytical universe, 30 that are traded on the major American stock exchanges broke beyond their 20-day price channels, four to the upside and 26 to the downside.

In addition, nine that are traded over the counter broke out, all to the downside.

Within my analytical universe, 1.7% of symbols gave bull or bear signals, down from 11% the prior trading day.

The ratio of bull to bear signals is 1:9, compared to 1:84 the prior trading day, suggesting the market's bearish bias has weakened.

Two of the major-exchange symbols survived my initial screening, IPGP having broken out to the upside and SD to the downside.

None of the over-the-counter symbols survived my initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Friday, June 7.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for...

• the odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
• a yield adjusted by those odds of 5% or greater,
• and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options whatever their open interest or sufficient volume to allow for the short sale of shares.

My cut-off point for bullish bias is a ratio of bull to bear signals of 2:1 or greater, and for bearish bias, 1:2 or smaller, rounded to the nearest whole number.

Thursday: No Trade

As I posted last night in "Thursday's Prospects", five symbols survived my initial screening, all of them breakouts to the downside.

I did the second wave of screening this morning. It is designed to further narrow the already fairly small pack to the best candidates for detailed analysis.

Three symbols -- GEOS, GIB and KRO -- quickly fell by the wayside based on their options' low open interest. I'm not looking for unhedged trades at this point, so that means I need options with open interest in at least the three figures.

Moreover, these are all bear signals, and those can only be played on stocks with sufficient liquidity to either support liquid options or as short sales of shares with sufficient volume to allow the shares to be borrowed.

Short sales on GEOS are possible, but not on GIB and KRO.

The remaining two, TYC and BYD, have sufficient option liquidity for me to trade.

The next stop is the chart. Both TYC and BYD are in the midst of uptrends. Their current signals are to the downside.

I'm a trend follower, so this discrepancy immediately puts me on my guard.

TYC's present trend on the weekly chart began in July 2012 after a sideways correction within a larger uptrend and is experiencing a so-far mild correction.

BYD is in the midst of a reversal of a long-running downtrend, and its reversal counts as an uptrend that began in November 2012. It is experiencing a sharp reversal to the downside from a level just below the peak  of an uptrend that ended in 2010.

My initial screening calculates odds within an arbitrary period based on the current trend of the S&P 500. But for the second wave analysis, I use the trend specific to the symbol I'm looking at.

The odds of success within a trend can be fairly dismal for counter-trend signals. Neither TYC nor BYD has produced a profitable bear signal since their present uptrends began.

At this point, I need look no further to make my decision. Neither symbol meets my criteria for trading, and therefore I won't be doing further analysis. I won't be opening any new positions today.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

How I exit hedged positions

This has been a brutal month for bull plays. The market's reversal to the downside on May 22 and subsequent 4.5% decline has produced exit signals on 12 of my 15 bull holdings.

An exit signal on shares is quite easy to deal with: Close the position immediately. Long shares have unlimited upside profit, but also the potential for loss all the way down to zero. Although they never expire and can be held as long as the stock is traded, enough of a decline produces a zombie position, so far in loss territory that it's barely worth dealing with.

But I generally don't trade shares. My preferred vehicle is a hedged position composed of vertical credit option spreads: Bull put spreads for trades to the upside and bear call spread for downside trades.

And the complexity of vertical credit spreads means that exit decisions become a matter of staging a tactical retreat rather than fleeing the battlefield willy-nilly as with shares.

The Investopedia article on vertical credit spreads can be read here.

Vertical credit spreads have maximum gain and loss. When the of the stock is above the break-even level, then the spread makes money with the passage of time. If it's below, then the spread loses money day by day.

A bull position can produce an exit signal, by the stock price moving below the 10-day price channel, while still being above the break-even level -- exiting with a profit. Or the decline can put the position into loss territory. Each exit signal and the condition of the vertical credit spreads is unique to the moment.

In Trader Heaven, of course, I would know which spreads to exit immediately and which to hold so I can profit from the passage of time.

In real-world trading, I find that have no idea which way a stock is going to move. All I know is the present price, the break-even level on my spreads and the points of maximum profit and loss.

Since I don't know the future direction of the stock price, the only means I have of crafting a tactical exit is to use the Reward/Risk Ratio, which asks: Do I have more to gain or lose by continuing to hold the position?

Since vertical credit spreads are also built out of options, I have another piece of information available to me: Implied volatility. This statistic tells me that options traders are pricing in confidence that 68.2% of trades will fall within a certain price range (statistically, one standard deviation) within a certain period of time.

An Investopedia article on implied volatility can be read here.

The period of time used on charts for implied volatility is one year. For the stock analyses that I post, I provide two ranges, one for a month out and the other for a week.

But for exit decisions, I find it useful to be more precise. I calculate the implied volatility for the remaining life of the options, up to expiration. As of today, for example, my June vertical credit spreads that have been battered so heavily have 16 days to live.

With that information in place, I can now calculate the reward/risk ratio for the implied volatility range and the remaining life of the options.

First, I calculate the range. I hold vertical credit spreads on Google (GOOG), which as of Wednesday's close had implied volatility of 0.2634 and was selling for $859.70. Options are pricing in confidence that 68.2% of GOOG trades will fall between $812.29 and $907.11 over the next 16 days.

In the example below, the numbers I use are very specific to my mix of option spreads on GOOG.

I calculate:

• The current risk, or the cost of selling the spread now. (For GOOG, that's a loss of $784.11.)
• The high boundary risk, or the cost of holding the spread until expiration if the stock closes on expiration day at the upper boundary of the implied volatility range. (GOOG: gain of 1,541.)
• The low boundary risk, or the cost of holding the spread until expiration if the stock closes on expiration day at the lower boundary of the implied volatility range. (GOOG: loss of $2,459.)

In other words, if I sell now it costs me $784 plus change, if the stock price reverses I have a two-thirds chance of showing a $1,541 profit, and if it continues to fall, I have a two-thirds chance of losing a painful $2,459.

As my next step, I then subtract the upside risk the current risk from the high boundary risk and also from the low boundary risk, getting a distance for each direction. That distance is my risk either way compared to my cost (or gain) if I exit now.

For GOOG, that worked out to $2,325.11 for the upside distance and $1,674.89 for the downside distance. 

At this point, it's clear that I have more to gain than to lose from where things are now. Putting those numbers into a ratio makes it precise: Upside distance divided by downside distance equals the Reward/Risk Ratio.

For my GOOG positions, it works out to 1.4, or a 40% better reward if the stock rises than my loss if the stock falls.

My general preference is to close immediately if the Reward/Risk Ratio is below 1, and to hold the position if it's above 1. Note that it's a preference, not a rule. A clearly awful panic to the downside on the chart will prompt me to ignore a ratio above 1 and exit immediately. Or I might continue to hold if the chart looks like a reversal to the upside is at hand, even if the ratio is below 1.

GOOG for the last three days has traded within the range set by a decline the fourth day prior, suggesting the decline is pausing. So I'll hold GOOG for now, but will continue to do the calculations and change my mind if conditions warrant.

A Google Docs spreadsheet with the calculations I used can be found here.

Certainly, I could treat spreads the way I do shares: Exit immediately. But option spreads are not only hedged, their leveraged, so a big loss can turn profitable with just a small move of the share price.

Again, using GOOG as my example. The break-even point on my spreads is $867.36, or $7.66 above Wednesday's close. The average daily move of the stock over the past 20 trading days has been $15.29.  So I'm actually just a half day's distance away from profit and glory.

Since to trade is to gamble, I'm always willing to take a chance if I find the odds and rewards are in my favor. That's why I do the complex analysis for spreads rather than folding my hand immediately.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

The number 68.2%, used with implied volatility in my discussion above, comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

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.

Thursday's Prospects

On Wednesday, June 5:

Of 2,309 stocks and exchange-traded funds in this week's analytical universe, 238 that are traded on the major American stock exchanges broke beyond their 20-day price channels, three to the upside and 235 to the downside.

In addition, 17 that are traded over the counter broke out, all to the downside.

Within my analytical universe, 11.0% of symbols gave bull or bear signals, up from 2.6% the prior trading day.

The ratio of bull to bear signals is 1:84, compared to 1:9 the prior trading day, suggesting the market's bearish bias is strengthening to a very high degree.

Five of the major-exchange symbols survived my initial screening, all to the downside. They are BYD, GEOS, GIB, KRO and TYC.

None of the over-the-counter symbols survived my initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Thursday, June 6.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for...

• the odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
• a yield adjusted by those odds of 5% or greater,
• and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options whatever their open interest or sufficient volume to allow for the short sale of shares.

My cut-off point for bullish bias is a ratio of bull to bear signals of 2:1 or greater, and for bearish bias, 1:2 or smaller, rounded to the nearest whole number.

JOBS: Bullish on China's Monster

51job Inc. (JOBS), in breaking above its 20-day price channel, also challenged the prior peak in a correction from its all-time high, $69.80, set in July 2011. The present bull signal, then, is part of an attempt by JOBS to reverse a downtrend of two years standing.

Altogether in two days JOBS rose by 9.5%, without any English-language news to buttress the dramatic price move. But the stock is an ADR of a Chinese company, so much of what drives the price will be invisible to U.S. traders.

The key level is $63.95, attained in April 2012. Tuesday's high, $65.58, neatly broke above that level, but in trading today the price pulled back to as low as $63.36 with three hours left before the closing bell. The price remains above the price channel, so the bull signal is intact.

This is the second bull signal since JOBS' present trend, a leg up within a downward correction, began in August 2012 from $34. The two completed bull signals were both successful, yielding 10.6% on average.

JOBS was one of two symbols that survived the initial screening posted last night in "Wednesday's Prospects". The other, CTXS, failed to confirm its bear signal by rising back within its 20-day price channel.

51job, headquartered in Shanghai, uses print publications and its website to match workers with jobs, sort of a Chinese version of Monster.com.

It is covered by fewer than a handful of analysts, so there's not enough opinion to calculate an enthusiasm index. All I can say is that analysts are more positive than not.

The company reports return on equity is 17% with no long-term debt.

51job has been profitable for at least the last 11 quarters. The last quarter reported showed lower earnings than the comparable year-ago quarter. The company has surprised to the upside eight times, and to the downside, three.

Institutional ownership is extremely low, at 26%. The price has been bid up to where it takes $8.04 in shares to control a dollar in sales.

JOBS on average trades 92,513 shares a day. That relatively low liquidity supports only a modest selection of option strike prices, with open interest mainly in the single digits and a 29.6% (!) bid/ask spread on front-month at-the-money calls.

The options fail big-time to meet my criteria and the only way I would trade JOBS is through long shares.

Implied volatility stands at 34%, at the bottom of the six-month range. I has been tracking generally sideways since early March.

Options are pricing in confidence that 68.2% of trades will fall between $57.80 and $70.23 over the next month, for a potential gain or loss of 9.7%, and between $61.03 and $67 over the next week. The volume on options is running 39% above the five-day average for calls, and 33% above average for puts.

The fair-price zone on today's 30-minute chart runs from $63.55 to $64.27, encompassing 68.2% of transactions surrounding the most-traded price, $63.81. Except for a fast slide in the first hour of trading, the price has traded almost entirely in the zone.

51job next publishes earnings on Aug. 5.

Decision for my account: Were it not for the lack of option liquidity, this is a trade I would consider taking. Out of caution, I might wait for a close above the prior swing high, $63.95, before opening a bull position.

However, in light of the bearish bias that has taken hold of the markets, I'm not interested at this point in bull positions that can't be hedged using options. So I won't be opening a position in JOBS.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

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.

Wednesday's Prospects

On Tuesday, June 4:

Of 2,309 stocks and exchange-traded funds in this week's analytical universe, 52 that are traded on the major American stock exchanges broke beyond their 20-day price channels, six to the upside and 46 to the downside.

In addition, nine that are traded over the counter broke out, all to the downside.

Within my analytical universe, 2.6% of symbols gave bull or bear signals, down from 4.4% the prior trading day.

The ratio of bull to bear signals is 1:9, compared to 1:12 the prior trading day, suggesting a weakening bearish bias to the market.

Two of the major-exchange symbols survived my initial screening, one in either direction. CTXS broke out to the upside, and JOBS to the downside.

None of the over-the-counter symbols survived my initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Wednesday, June 5.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for...

• the odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
• a yield adjusted by those odds of 5% or greater,
• and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options whatever their open interest or sufficient volume to allow for the short sale of shares.

My cut-off point for bullish bias is a ratio of bull to bear signals of 2:1 or greater, and for bearish bias, 1:2 or smaller, rounded to the nearest whole number.

ALXN: A chart and bear signal disconnect

Alexion Pharmaceuticals Inc. (ALXN) produced a bear signal amid a comparatively shallow correction within a persistent long-term uptrend. That's not to say that the correction might not eventually lead to a downtrend, but it is far from being there at this point.

ALXN began its rise in 2009, in company with many stocks as the recovery from the Great Recession crash took hold.

In the ensuing four years it has corrected, of course, but in contrast to many stocks, none of the corrections came close to bringing the weekly-chart uptrend to an end.

The correction that began from $119.54 in October 2012 began as the steepest of them all, five solid weeks of unrelenting decline that finally bounced from $86.20, only to retrace to yet a lower low, $81.62 last February.

It's what happened next that provides the disconnect between the signal and the chart. The price began to stairstep upward in a series of higher highs and higher lows, hitting a correction peak of $108.13 on May 13 before falling again.

The bear signal given on Monday was followed by an intra-day low of $91.94, which is above the prior low of $88.86. And the price today, while confirming the bull signal, has failed to set yet another low.

The daily-chart pattern can reasonably be interpreted as an incipient reversal rather than a downtrend. And of course the weekly chart, while correcting, remains in an uptrend.

Just based on the charts, my anomaly alarm is ringing furiously, telling me not to take this trade.

Yet, ALXN has good odds of a successful bear trade. This is the third bear signal since the correction began in October 2012. Both of the prior signals were profitable, with an average yield of 6.5%. There were four bull signals during that period, none of them profitable.

The odds are very much at odds with my reading of the chart.

ALXN was one of four bear signals to survive my initial screening. (See "Tuesday's Prospects" posted last night.) Two of the symbols, MDP and MATX, had insufficient open interest on options to meet my criteria.

A hedged options position on MLNX was doable, but barely so. MLNX had an ambiguous chart that was more bearish within an uptrend than ALXN's and also showed good odds of success to the bear side. The main issue with MLNX was its lower liquidity.

Alexion, headquartered in Cheshire, Connecticut, developed a drug use to treat several diseases of the circulatory system that result in the destruction of red blood cells and is researching ways to stop the immune system from attacking healthy tissue.

Like all pharmaceutical companies, its financial health and stock price are at the mercy of the Food and Drug Administration, which has the power to overturn expectations or to power profits and the stock price to new heights with a single regulatory ruling.

Analysts are looking on the glass-half-full side in their expectations for ALXN. Their opinion collectively works out to a 53% enthusiasm rating.

The financials buttress that bullish narrative. Alexion reports a 21% return on equity, and long-term debt is quite low, at only 5% of equity. By my definition that amounts to a growth stock.

The company has been profitable for at least the last 2 quarters, and with two minor exceptions, each quarter has been more profitable than the last. Each quarter has surprised to the upside.

Institutions own 95% of ALXN's shares, and the price has been bid up to a high level: It takes $15.17 in shares to control a dollar in sales.

ALXN on average trades 1.1 million shares a day, sufficient to support a moderate selection of options strike prices with open interest running to two and three figures.

I normally require three-figure open option for my vertical credit spreads, and that would work with ALXN, whose call options that would be the vehicles for such a play to the bear side all have open interest above 100.

Open interest on front-month at-the-money puts is 3.6%.

Implied volatility stands at 36%, slightly above the mid-point of the six-month range. Options are pricing in confidence that 68.2% of trades will fall between $83.52 and $103.06 over the next month, for a potential gain or loss of 10.5%, and between $88.60 and $97.98 over the next week.

With 10 hours to go before the closing bell, options trading is tilted heavily toward the bull side. Call options are trading 51% above the five-day average volume, compared to only 31% of the average for puts.

The fair-price zone on today's 30-minute chart runs from $94.03 to $95.45, encompassing 68.2% of transactions surrounding the most-traded price, $94.84. The opened at the top of the zone and has declined steadily until it is now trading below the zone, indicating a lack of very near term upside momentum.

Alexion next publishes earnings on July 22.

Decision for my account: ALXN has given a valid bear signal, and the odds buttress the case for a bear trade. But I'm passing on it. Everything else about ALXN, from the charts to the financials, screams "Bull play!"

A decline below $88.12 followed by an upward reversal than turned back down somewhere below $108.13 and then continued on to a lower low would make the bearish case easier to make. In my mindset, the chart always trumps the financials.

But ALXN isn't there yet, and so won't be a trade for me today.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

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.

Tuesday's Prospects

On Monday, June 3:

Of 2,309 stocks and exchange-traded funds in this week's analytical universe, 93 that are traded on the major American stock exchanges broke beyond their 20-day price channels, six to the upside and 87 to the downside.

In addition, nine that are traded over the counter broke out, two to the upside and seven to the downside.

Within my analytical universe, 4.4% of symbols gave bull or bear signals, down from 7.8% the prior trading day.

The ratio of bull to bear signals is 1:12, compared to 1:44 the prior trading day, suggesting a weakening bearish bias to the market.

Four of the major-exchange symbols survived my initial screening, all having broken out to the downside. They are ALXN, MATX, MDP and MLNX.

None of the over-the-counter symbols survived my initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Tuesday, June 4.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for

• the odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
• a yield adjusted by those odds of 5% or greater,
• and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options whatever their open interest or sufficient volume to allow for the short sale of shares.

My cut-off point for bullish bias is a ratio of bull to bear signals of 2:1 or greater, and for bearish bias, 1:2 or smaller, rounded to the nearest whole number.

Monday: No Trade

As noted over the weekend in "Monday's Prospects", no symbols survived my initial screening, so I won't be opening any new positions today.

Nearly all of the symbols failed because their history showed poor odds of a profitable downside trade since the present S&P 500 trend began. The rest failed because their bear trades were insufficiently profitable to meet my criteria -- the idea behind the latter test being that I don't want to take a risk for chump change.

The reason for the poor odds and low profits to the  bear side is no great mystery. The S&P 500 and been in a huge uptrend since Oct. 4, 2011, one that carried prices up 57% to an all-time high on May 22, seven trading days ago.

When the market as a whole is moving up, trades to the downside come during corrections to the main trend, and corrections by definition cover less ground than moves in the direction of the trend.

If the downtrend continues, the paucity of trades will sort itself out in fairly short order. My standards require at least even odds of a profitable trade -- a 50% success rate.

Eighteen symbols that failed the odds test had success rates of 40% or better, meaning they're just a few profitable bear signals away from meeting the odds test. Eight were within five percentage points of even odds, which is very close to meeting the test.

Five of the 18 symbols with 40% or greater odds also had sufficient profit to meet my criteria.

And of course, if the downtrend reverses and the uptrend reasserts itself, then I'll have a wealth of potential trades as the high bull-signal odds of success flow into my analysis.

A private trader's greatest strength in the market is the ability to stay on the sidelines when conditions warrant.

By producing no potential trades, my analysis is doing its job: Keeping me out of the market until the trend, one way or the other, attains a degree of clarity.

The Week Ahead: Jobs and Leading Indicators

The Labor Department's employment report will give the markets something to buzz about all week. The focus will be heightened by the prior week's rampant speculation about the Feds intentions: Tighten credit now? Tighten later?

A larger-than-usual collection of leading indicators will also hit the headlines.

The employment report will be released Friday at 8:30 a.m. Eastern.

The ADP employment report, issued by the giant payroll processing company, will provide a sneak preview of the government report when it is issued on Wednesday at 8:15 a.m. And the weekly jobless claims report, Thursday at 8:30 a.m., will provide still more fuel for the employment media fire.

Two other major releases will add spice to the economic stew: The ISM manufacturing survey, produced by the Institute of Supply Management, on Monday at 10 a.m., and international trade on Tuesday at 8:30 a.m.

Leading indicators (in descending order of importance):

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

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

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

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

Vendor performance (the delivery times index) from the ISM manufacturing survey, at 10 a.m. Monday.

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

Average weekly initial jobless claims, at 8:30 a.m. Thursday.

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

Other reports of interest:

Monday:  The Purchasing Managers' manufacturing index, shortly before 9 a.m., and construction spending at 10 a.m.

Tuesday: Motor vehicle sales throughout the day.

Wednesday: Productivity and costs at 8:30 a.m., the ISM non-manufacturing index at 10 a.m., petroleum inventories at 10:30 a.m. and the Federal Reserve Beige Book at 2 p.m.

I also follow the Baltic dry index, released daily, tracking the volume of global maritime shipments of coal, iron ore, grain and other raw materials.

Fedsters

There's nothing like a jobs report and the Beige Book to bring the Fedsters into full bloom, like dandelions on a sunny spring day.

Two members of the Federal Open Market Committee, Fed Gov. Sarah Bloom Raskin and Kansas City Fed Pres. Esther George, and an FOMC alternate, Dallas Fed Pres. Richard Fisher, speak on Tuesday.

Raskin and an FOMC alternate, Philadelphia Fed Pres. Charles Plosser, speak on Thursday.

Analytical universe

This week I'll be analyzing new bull and bear signals among 2,309 stocks and exchange-traded funds that have some analyst interest. They are traded both on the major U.S. exchanges and over-the-counter. My universe is selected from mid-cap stocks and larger, defined as market capitalization of $1 billion and greater.

Trading calendar

By my rules, I'm trading July options for short vertical  spreads and September options for single calls and puts. Of course, shares are good at any time.

Good trading!

The Teddy Bears' Picnic

For every bear that ever there was will gather there for certain

Because today's the day the Teddy Bears have their picnic

--"Teddy Bears' Picnic", by John Walter Bratton.

There's a term in market-speak, "capitulation". It's used when a trend change that has been hinted at for a time finally takes hold, and everyone piles on to drive the market in the new direction.

I'm loathe to say the market has capitulated -- the S&P 500 remains in an uptrend and it has been correcting for only six trading days.

But the numbers that I got when I analyzed Friday's trading certainly add up to something major happening. It's as though the markets held a picnic, but only the bears showed up.

My posting "Monday's Prospects" gives the details of my analysis of Friday's market results, but here are the headlines:

• Ratio of bull signals to bear signals: 1:44.
• Percentage of symbols giving a signal: 7.8%.

Bull and bear signals under the system I use are in a way of measure of momentum. (You can read my trading rules, which describe the system, by clicking here.)

The symbol has to be moving directionally in order to give a signal. It also has an element of volatility: A symbol that moves in a straight line up or down won't produce many signals, where as a symbol that zig-zags along its trend will signal more often.

The best explanation I have for the situation -- a large number of signals by stocks that haven't been prone to give signals in the past -- is that the bearish bias has spread beyond the more volatile stocks to their less volatility siblings.

In other words, the breadth of the decline has grown, and that's an argument for favoring the bear side in making trading decisions.

On the other hand, Friday's volume on the exchange-traded fund SPY is not particularly high. Looking at the past month -- 20 trading days, the volume level only ranks 3rd. I would expect much higher volume in a true capitulation.

And there's the pesky truth of the chart. SPY on Friday fell below the 10-day price channel, a signal under my system to close the bull phase that began April 10. But trend analysis -- the pattern of the highs and lows -- shows that the index remains in an uptrend. (See the discussion in my May 28 posting "Tuesday: No Trade with musings on perspective" for my trend analysis.)

For my own trading, I don't plan to stumble out of my bull positions based on these numbers. Nearly all are hedged through the use of option spreads. But until the numbers change back to an obviously bullish bias, I'll be giving priority to bear plays.

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.

Monday's Prospects

On Friday, May 31:

Of 2,309 stocks and exchange-traded funds in this week's analytical universe, 153 that are traded on the major American stock exchanges broke beyond their 20-day price channels, three to the upside and 150 to the downside.

In addition, 27 that are traded over the counter broke out, one to the upside and 26 to the downside.

Within my analytical universe, 7.8% of symbols gave bull or bear signals, down from 2.7% the prior trading day.

The ratio of bull to bear signals is 1:44.0 (one to forty-four is correct, not a typo), compared to 1:1.4 the prior trading day, showing a strongly bearish bias to the market. My cut-off point for bullish bias is 2:1 or greater, and for bearish bias, 1:2 or smaller.

None of the major-exchange symbols survived my initial screening, almost entirely because of less than even odds of success and low yields adjusted by the odds.

None of the over-the-counter symbols survived my initial screening.

I'll do further analysis on the survivors that confirm their signals by trading beyond their breakout levels on Monday, June 3.

Uh, well, no survivors so no analysis on Monday. I won't be opening any new positions on Monday.

The symbols I cover are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for

• the odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
• a yield adjusted by those odds of 5% or greater,
• and absence of an earnings announcement within the next 30 days. 

For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options or sufficient liquidity to allow for short sale.