PEP, BKD, LAMR: Tough Choices

First the numbers: I tracked precisely 1,000 stocks and exchange-traded funds in my analysis of Monday's market action.

Sixteen of them broke beyond their 20-day price channels to give a trading signal, 14 to the bull side and two to the bear side.

Of those 16, eight were excluded under my rules because they have earnings announcements coming within a month.

Of the remaining eight, five dropped back into their price channels in today's trading and so failed the confirmation test.

That leaves three, all to the bull side, and as it turns out, each is flawed in some way that makes the trading decision less than straightforward.

In the grafs that follow, I'll walking through my decision process using the historical data, back to January 2009, that I've added to my analytical mix. The data allows me to calculate success rates and average returns on each stock's winning trades. Put more simply, the data gives me what I need to calculate the odds of success.

The most liquid of the three stocks is PepsiCo Inc. (PEP), the giant soft-drink maker. It trades 5 million shares a day and so has an excellent selection of options with high open interest and narrow spreads. It has return on equity of 30%.

Most important, PEP has success rate of 53% in breakouts to the upside. That's sufficient edge if the successful breakouts are productive -- if they produce sufficient profit.

But in the case of PEP, the average return on successful bullish trades is only 3.4%, which works out to 1.8% when adjusted for the success rate. That's not enough return in my book to make the trade worthwhile. Generally, I'm looking for 5% or greater.

Brookdale Senior Living Inc. (BKD), a national assisted living chain headquartered in Brentwood, Tennessee, that operates more than 550 living facilities for seniors with 52,000 residents.

BKD is is less liquid than PEP, trading 883,000 shares a day, and that shows in the options grid, which has a limited selection of strike prices.

The bid/ask spreads aren't awful, but the open interest is. In order to create my preferred vertical options spread for the opening position, I would have a choice of two put strike prices having open interest, one in the low double digits and one in the singles. I can't trade something that illiquid.

Moreover, BKD has a negative return on equity, -3%, with debt that is nearly double equity. It's not a firm rule, but I have a strong prejudice against opening bull positions on companies that have a negative return.

Also, BKD has an upside success rate of 47.1%; its bullish breakouts lose money more often than they make it, which is a deal-killer under the methods I use for trading now. Even so, the return on those successful trades is 26.1% on average, giving BKD the highest adjusted yield of the three, at 12.3%.

The third prospect is Lamar Advertising Inc. (LAMR), a Baton Rouge, Louisiana outdoor advertising company with 143,000 billboard displays in 44 states, Canada and Puerto Rico. Lamar trades 632,000 shares a day. Counter intuitively, it has a broader options strike selection than BKD, but the open interest picture is quite similar. It's not liquid enough for options trading.

Unlike BKD, LAMR has a positive return on equity, although not a very impressive one, at 3%, with a huge load of debt amount to 237% of equity.

It has the best success rate of the three, at 73.3%, with average return of 16%. That gives an excellent adjusted yield of 11.7%.

So, based on the numbers, LAMR is the top choice. PEP gets bumped from consideration because of its low adjusted yield, and BKD because of its negative return on equity.

But the only way to trade LAMR, given the low open interest of its options, to to buy shares. And buying shares means that I'm giving up a huge amount of leverage that multiplies my returns (and my losses, if things head south).

Take PEP as an example. It is selling at $7,171 for a round lot, 100 shares. Under my rules, today I'm trading April long options with strike prices as close to 70 as I can manage. In the case of PEP, that's the April $70 strike with a delta of 63, with an ask price of $257 per lot.

Now, with options, of course, a delta of 63 means that a dollar move in the price of the stock just means a 63 cent move in the price of the option. So, actually, the comparable price of a lot is $407.94, or the lot price, $257, divided by the delta, 0.63.

To get the lever, I simply divide the price of a stock lot by the adjusted options price, and I come up with my leverage, which in this case is about 18:1 (17.578565:1, if you're into precision).

That puts a whole different spin on the adjusted return. The best I can expect from LAMR stock is an adjusted return of 11.7%. With leverage, PEP will give me a return of 32.2%.

PEP, then, becomes the top choice...

Decision for my account: ... but a poor choice indeed. Remember, the success rate is only 53%. That's not much better than break-even. I'm really happier with something closer to 60% or better. Also, while 32% yield sounds a like a good deal, I'm normally look for adjusted returns of 5% or better, which is a 60% yield with the leverage options provide.

So based on the odds, I'm rejecting PEP as well. This is will be a no new trade day at Private Trader. 

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing the tool.) A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found 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.

CIEN: Bearish breakout amid dismal financials

Ciena Corp. (CIEN) has negative return on equity, hasn't earned a profit in nine of the past 12 quarters, and carries liabilities so high as to enter the realm of the ridiculous. A perfect play, in other words, for a breakout below its 20-day price channel.

Betting against CIEN has been a profitable game. My records show that seven as of 12 breakouts to the downside have been profitable since January 2009, with returns average 9.7% per trade. The return adjusted for the frequency of profitable breakouts is 6.8%.

Despite the company's miserable financial record, CIEN has been on what could be construed as an uptrend since October 2011, at least if you down a shot of whiskey and then squint real hard. The price has traced out a series of higher lows and higher highs in that period, although the rise of the extremes has been shallow enough to make the whole structure look suspiciously like a sideways correction.

More recently, CIEN executed a rise from $11.96 on Oct. 23, 2012 up to $16.72 on Jan. 3. From the peak, it fell for six trading days, and on Friday it broke below its low of the past 20 days: $14.76.

It would take a rise above $16.72 to reestablish the uptrend, and yet the correction has been quite shallow so far.

CIEN is one of 23 highly liquid stocks that broke beyond their price channels on Friday. Thirteen broke out to the upside and 11 to the downside, with success rates in the direction of breakout running from 87% down to 20%.

Headquartered in Linthicum, Maryland, Ciena provides optical networking equipment, a key component of the infrastructure of high-speed communications.

Amazingly, given Ciena's financials, analysts overall are net positive on the company, collectively producing an 11% enthusiasm score. However, that score is down from the 37% of three months earlier.

With negative equity and negative net income, there's really no way to do a meaningful calculation of return on equity -- there's no equity on which to generate a return! Same with the debt to equity ratio.

I'll just note than the company at last report has negative 89 cents per share in equity, net income of negative $1.44 per share and liabilities totaling $6.84 per share.

Institutions own nearly all of CIEN's shares, and the price is not abysmally low. It takes 80 cents in shares to control a dollar in sales.

Analysts are forward looking in their assessments, so I can only assume that they expect Cienna to turn around in some fashion. Although the last two quarters showed losses, the company was profitable during one quarter in 2012 and two in 2011. It has surprised to the upside five times in the last q2 quarters, and to the downside seven times.

So if the stars are aligned, the company has proven that it can make money. But all of this is, frankly, irrelevant to my trading. I trade charts. CIEN has broken out to the downside on the daily chart, the odds of a profitable trade in that direction are quite good, so at this point under my rules it appears to be a trade worth taking.

CIEN on average trades 3.8 million shares per day, sufficient to provide a moderate selection of option strike prices with open interest running to the three- and four-figures in the front month. The front-month at-the-money bid/ask spread for puts is 4.4%.

Implied volatility stands at 48%, in the bottom half of the six-month range. It has been moving sideways at about that level since the start of the year.

Options are pricing in confidence that 68.2% of trades will fall between $12.62 and $16.68 over the next month, for a potential gain or loss of 14%, and between $13.67 and $15.63 over the next week.

Call options are trading at more than double their five-day average volume, and puts are in the cellar at 29% of average volume.

The fair-price zone on today's 30-minute cdhart runs from $14.58 to $14.72, encompasssing 68.2% of transactions surrounding the most-traded price, $14.67, where the stock is trading four hours before the close. The stock has remained within the zone for most of the day so far.

Ciena next publishes earnings on March 4.

Decision for my account: I took the trade based on the historical odds of a successful bear trade in the context of some truly awful financials. 

I structured the trade as a bear call options spread expiring in February, short the $15 call and long the $17 call. This structure makes the position profitable up to $15.47, for a 5.2% cushion. The maximum potential return at expiration is 31%.

If I had to the position as it continues to fall, I'll buy puts expiring in April with deltas as close to 70 as I can manage.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing the tool.) A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found 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.

The Week Ahead: 'Flation

This is inflation week on the economic calendar. Or perhaps deflation. Not that inflation or deflation has been much of a presence in our financial lives of late. But fear of the twin beasts? That's a different story entirely. Worry over the two 'flations underlies much of the much debate that is pulling Washington apart.

The producer price index will be published at 8:30 a.m. Eastern on Tuesday, to be followed by the big one, the consumer price index, at 8:30 a.m. on Wednesday.

Otherwise, the week presents a potpourri of major reports that lack an overarching theme: Retail sales at 8:30 a.m. Tuesday, industrial production at 9:15 a.m. Wednesday, housing starts at 8:30 a.m. Thursday, and the Philadelphia Fed survey -- an avatar for manufacturing in general -- also on Thursday, at 10 a.m.

Leading indicators (in descending order of importance):

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

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

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

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

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

Index of consumer expectations from the Reuters/University of Michigan consumer sentiment report on Friday at 9:55 a.m.

Other reports of interest:

Tuesday: Empire State manufacturing survey of New York business at 8:30 a.m., and business inventories at 10 a.m.

Wednesday: The Treasury Department's international capital report, tracking flows of foreign money into and out of the United States at 9 a.m., the Home Builders' housing market index at 10 a.m., petroleum inventories at 10:30 a.m., and the Federal Reserve's Beige Book, a narrative of economic conditions in the central bank's 12 regions.

Fedsters

The big names in monetary policy are out in full force during the week, speechifying no doubt in the hope of edifying the public about their sometimes arcane work.

Federal Reserve Chairman Ben Bernanke speaks at the University of Michigan on Monday at 4:30 p.m.

Two other members of the Federal Open Market Committee are making appearances: San Francisco Fed Pres. John Williams on Monday and Atlanta Fed Pres. Dennis Lockhart on Monday and Thursday.

One FOMC alternate is speaking: Boston Fed Pres. Eric Rosengren on Tuesday.

I don't normally track Fedsters who don't current sit on the FOMC, but a few speakers are out there who routinely produce headlines, despite their lack of involvement in setting policy.

Minneapolis Fed Pres. Narayana Kocherlakota speaks Tuesday and Wednesday, Philadelphia Fed Pres. Charles Plosser on Tuesday, and Dallas Fed Pres. Richard Fisher on Wednesday

Trading calendar

By my rules, as of Monday I'm using February options for the short legs of spreads and April options for single calls and puts and the long legs of spreads. Of course, shares are good at any time.

Good trading!

CHS: Bearish on women's apparel

Chico's FAS Inc. (CHS) dropped below it's $17.45 on Thursday, its lowest price of the past 20 trading days, giving a bear signal under the Turtle Trading method.

It is the 32nd breakout from the 20-day price channel for CHS since January 2009. Three-fourths of the CHS bearish signals have been profitable, for an average gain of 9.2%. The average profit from successful bearish trades, adjusted for the rate of success, is 6.9%.

By comparison, bullish breakouts have only a 40% success rate.

CHS has been in a sideways movement since mid-August, with a floor of $17.48 and a ceiling of $19.76.

It culminates a rise from $9.57 that began in November 2011 and peaked on Nov. 6, 2012 at $19.76 for a stunning doubling of the price in a year.

As I look at this chart, my best narrative is that the sidewinder is a large topping structure that is prelude to a downside correction. The bearish breakout on Thursday supports that narrative, but an alternative narrative, that the sidewinder is a pause before the rise resumes, also has plausibility.

Altogether 21 of the 1,052 stocks I follow broke beyond their 20-day price channels on Thursday, four of them to the downside, with returns adjusted for success in the direction of the breakout ranging from 12.5% down to 1.1%.

Only five of the breakouts are tradeable because of earnings announcements; my rule is to not open new positions within 30 days of earnings, and we are heavily in the 4th quarter earnings season.

Chico's, headquartered in Fort Myers, Florida, designs and markets women's apparel through more than 1,200 stores and outlets in the United States and its Caribbean territories, under the names Chico's, White House | Black Market and Soma.

The company is faced with declining favor among analysts. Three months ago they were collectively neutral on the company; they've now dropped to a negative 29% enthusiasm rating.

The lack of enthusiasm flies in the face of the long rise in the stock price and also Chico's 16% return on equity with no long-term debt. The latter are a happy, healthy pair of financial numbers that any company would love to have.

Chico's has been profitable for the 12 past quarters. Profits tend to peak in the 2nd and 3rd quarters -- spring and summer -- and those quarterly profits have risen steadily since at least 2010.

The company has surprised to the upside in 10 quarters, and to the downside in two.

Institutions own 82% of shares, and the price is near sales parity; it takes $1.16 in shares to control a dollar in sales.

CHS on average trades 2.8 million shares a day, supporting a moderately good selection of stock option strikes with open interest running mainly to the three figures, with a few outliers in either direction.

The bid/ask spread on front-month at-the-money puts 11%, a bit on the high side.

Implied volatility stands at 31%, in the bottom half of its six-month range. Volatility has been meandering sideways since November.

Options are pricing in confidence that 68.2% of trades will fall between $15.92 and $19.02 over the next month, for a potential gain or loss of 9%, and between $16.73 and $18.21 over the next week.

Call options are trading today at more than triple their five-day average volume, compare to puts at 70% of average volume.

The fair price zone on today's 30-minute chart runs from $17.28 to $17.43, encompassing 68.2% of trades surrounding the most-traded price, $17.36. Four hours before the close, CHS is trading above the fair price zone but is far from establishing a new most-traded price.

So it's a somewhat bullish pattern in today's trading due to a sharp rise between 11:30 a.m. and noon Eastern. But the mini-rise has stalled and may well drop back into the zone.

Chico's next publishes earnings on Feb. 28. The stock goes ex-dividend in February for a quarterly payout yielding 1.2% annualized at today's prices.

Decision for my account: The strong historical odds of success to the downside make a bearish decision for CHS an easy one to take. Yet that bias is offset by a bullish bias to the chart and to the company's financials. The decision, like all of my trading decisions, was based on the short-term, chart-based nature of my trading style. It's a bearish breakout under my rules. Previous bearish breakouts have tended to be successful. Playing with the odds is a no-brainer.

I've opened a bearish position on CHS, structuring it as a bear call vertical spread expiring Feb. 15, short the $18 call and long the $21 call. This structure makes the position profitable at expiration up to $18.85, for an 8% cushion. The maximum yield on the position is nearly 40%.

If the price continues to fall, I'll add to it by buying puts expiring in May.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing the tool.) A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found 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.

GGC: Bullish on plastics

Georgia Gulf Corp. (GGC) broke above it's 20-day price channel on Wednesday and was trading still higher today, although without significant upside momentum. The break above the $46.34 boundary came on the fourth day of an upswing that, so far, has carried the price up 17.1% to today's high of $47.73.

Since January 2009 GGC has been profitable in seven out of every 10 breakouts to the upside, with the net gain of successful trades averaging 19.9%. Adjusting the average gain by the success rate (71.4%) gives a score of 14.2%.

Altogether GGC has broken the price channel 31 times in the period I'm tracking, 15 of those to the upside.

GGC has been stairstepping higher since October 2011. The rise of the past two weeks ends a correction that drew the price down to $39.65.

GGC was one of nine stocks that broke beyond their price channels on Wednesday, six to the upside and three to the downside. The success rates in the direction of breakout range from 71.4% down to 60%, the average profits from successful trades in the breakout direction from 21.3% down to 3.7%, and the profits adjusted by the success rates from 14.2% down to 1.8%.

Georgia Gulf , headquartered in Atlanta, Georgia, is a major manufacturer of chemicals with wide industrial application, and also produces building materials. The company's products are used to make high performance plastics, pulp and paper, packaging. They also have application in medicine, including pharmaceuticals.

Perhaps it's because Georgia Gulf's industry has an old-line and stodgy feel to it -- "plastics" has been a laugh line ever since The Graduate hit the movie screens in 1967 -- analysts are unimpressed by the stock.

They collectively give it an enthusiasm index of a negative 14%, which is a bit puzzling given the company's numbers.

Georgia Gulf  reports return on equity of 17%, which is not far below growth-stock territory. Long-term debt is far higher than I like, at 96% of equity, but still, these are not figures that indicate a struggling company.

Earnings the past 12 quarters have been all over the place, without a trend, but profitable for the past 10 quarters. Earnings tend to peak in summer 3rd quarter, and the most recent 3rd quarter report showed earnings that were nearly double the previous 3rd-quarter best. Looking at the 3rd quarter alone, there's a discernible uptrend in earnings.

Georgia Gulf has surprised to the upside 10 times in the last 12 quarters (including the two losing quarters back in 2009/2010), and twice to the downside.

Institutions own nearly all the shares, yet the price is extremely cheap. It takes only 50 cents in shares to control a dollar in sales.

On average GGC trades 2.7 million shares a day an supports an adequate selection of option strike prices with open interest near the money running mainly in the four figures, with some outliers in three and five figures.

The front-month at-the-money call option has a 9.1% bid/ask spread, which is tending toward the high side for a stock with that much trading volume.

Implied volatility is high, at 54%, and stands near the maximum of the last six months. It was on the rise on Jan. 7 and Jan. 8 but faltered on the 9th before recovering somewhat today.

Options are pricing in confidence that 68.2% of trades will fall between $39.84 and $54.68 over the next month, for a potential gain or loss of 16%, and between $43.69 and $50.83 over the next week.

Call options are trading 7% above their average volume of the past five days, and puts are trading at about 15% below the average volume.

The fair-price zone on today's 30-minute chart runs from $46.89 to $47.41, encompassing 68.2% of transactions surrounding the most-traded price, $47.20. Five hours before the close, GGC was trading within the zone and near the most-traded price. It's not a particularly bullish pattern from a one-day perspective, but not bearish either.

Georgia Gulf next publishes earnings on Feb. 11. The stock goes ex-dividend sometime in March for a quarterly payout yielding 0.68% at today's prices.

Decision for my account: I've opened a bull position on GGC, structuring it as a bull put option spread expiring Feb. 15, short the $45 put and long the $40 put. This makes the trade profitable down to $43.64, providing a 7.5% cushion below my entry point. Maximum yield is about 21%.

My decision was based primarily on the historical odds of success when GGC breaks out to the upside and the average potential gain on successful trades. I'm not crazy about the price to sales ratio. Prices that low are usually low for a reason. But there's nothing to hate about the stock.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing the tool.) A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found 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.

NTAP: Attack of the Cloud Monster

NetApp Inc. (NTAP) broke below it's 20-day price channel boundary, $32.68,  on Tuesday as a Chicago investment banking company, William Blair,  warned of lower returns for the data storage industry as companies move their data to the Cloud.

NTAP's breakouts to the downside have been profitable seven out of 10 times since January 2009, for an average gain of 9.1%. Its directional score, combining the downside success rate (70.6%) and the average profit of successful bearish trades, is 6.5.

The breakout was confirmed Wednesday morning as the stock opened a penny below the breakout level and continued to fall.

There were nine breakouts on Tuesday among the 1,052 stocks and exchange-traded funds I'm following this week. They were selected as having a price of $15 and above and average volume of 500,000 and up.

Five issues broke out to the upside, and four to the downside. The directional success rates run from 56.3% up to 64.5%. (Actually, one, a fairly new issue trading under the symbol HLSS, had a success rate of 100%, but I'm discounting that because of short history in the data.)

NTAP's bearish breakout comes after a failed, not very serious attempt to reach a higher high in a six-month trendless period that has seen the price stay in a range from $26.26 to $36.41. The most recent uptrend within that range peaked Jan. 3 at $34.82.

Longer term, NTAP has been zig-zagging downward for the past two years after peaking at $61.02 in early 2011.

NetApp, based in Sunnyvale, Calif., earned its chops building high-end, super-efficient storage architectures for businesses. The Cloud is far less efficient, but also far less expensive, and corporations have been embracing it with a passion.

Also, the barriers to entry as a Cloud storage provider are lower than for NetApp's core storage architecture niche. It's the usual Internet story that is playing out in music, newspapers, video, books -- make it cheap and ubiquitous, thereby challenging the old business models of scarcity.

William Blair is not alone. Analysts as a group aren't very optimistic about NTAP's prospects, with a collective enthusiasm index of negative 38%.

NetApp on the books is in a fairly good position, however, with return on equity of 13% and no long-term debt.

The company has been consistently profitable for at least the last 12 quarters, although the latter two quarters of 2012 showed profits below what had been the norm for the past two and a half years.

Earnings have surprised to the upside 10 times in the last dozen quarters, and twice to the downside.

Institutions own 90% of shares, and the price is only slightly above sales parity. It takes $1.86 in shares to control a dollar in sales.

NTAP on average trades 5.5 million shares a day, sufficient to support a moderately good selection of option strike prices with open interest mainly in the three figures, with a few at four figures. The front-month at-the money puts have a 1.2% bid/ask spread.

Implied volatility stands at 42%, slightly below the mid-point of the six-month average. It has been rising gently since Jan. 3.

Options are pricing in confidence that 68.2% of trades will fall between $28.28 and $36.06 over the next month, for a potential gain or loss of 12%, and between $30.30 and $34.04 over the next week.

Options are less active than has been typical of the past five trading days, with calls trading at 81% of their five-day average volume and puts at 53% of the average.

The fair-price zone on today's 30-minute chart runs from $32.24 to $32.74, encompassing 68.2% of transactions surrounding the most-traded price, $32.60.

The price has been falling since the second half-hour of trading today and now, with four hours before the close, stands below the zone. As the day has progressed, NTAP has set a secondary price peak with high volume ranging from $32.25 to $32.28.

NetApp next publishes earnings on Feb. 13.

Decision for my account: I've opened a bear position on NTAP, structuring the trade as a bear call spread expiring Feb. 15, short the $34 call and long the $36 call. This means the position will be profitable at expiration up to $34.52, giving me a 6.6% cushion in case the the breakout proves to be a false positive. If the price continues to fall, I shall add to the position by buying puts that expire in June.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing the tool.) A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found 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.

Fishing for trades snares VPHM

Regular readers will know that beginning Monday, I've added a new set of analytical tools to my trading mix that allow me to assign historical odds to a price breakout resulting in a winning trade.

Far to often as traders we sink into habits (a good read on the subject is The Power of Habit by Charles Duhigg). The beauty of new tools is that they shock us into new ways of trading.

Case in point: For years I've concentrated my trading on highly liquid stocks. That meant I was habitually tracking around 250 stocks at any one time.

My new toolkit, which I custom wrote in the programming language perl, allows me to do a more thorough and rational job of weeding out trades likely to have losing results.

As a consequence, a 250 stock universe is far to small to produce enough trades to support my operation.

That paucity of good trades is exaggerated by the fact that we're entering earnings season, which means under my rules that I can't open new positions in a company within 30 days of its earnings announcement.

So this morning, when I ran my report on highly liquid stocks, I found nine breakouts, only three of which scored high enough to interest me. Of those three, one was knocked out because of a pending earnings announcement. And the remaining two dropped back within the price channel today, and so their breakouts weren't confirmed.

The net result: Zero possible trades.

I reworked my universe by lowering the floor on average volume from 2 million shares a day down to 500,000 shares, producing a universe of 1,049 stocks.

Please note that these are in no way penny stocks. A volume of 500,000 shares is liquid, and the stocks are priced at $15 and up, have stock options associated with them, and are tracked by the stock analysis web site Zacks.

Among those, there were 31 breakouts beyond the 20-day price channel on Monday. Nine of those were both confirmed and were free of earnings announcements for the next 30 days.

By expanding my universe, I now have some trade possibilities, all of them issues that I've not looked at before.

For scoring, I combine the odds of successful trade with the average magnitude of profit when trades succeed.

My rule of thumb is that I want to see a score of five or better in the direction of the breakout -- up or down -- and also for all breakouts whatever the direction.

Four stocks met that criteria. In descending order of average volume, they are Ocwen Financial Corp. (OCN), Catamaran Corp. (CTRX), Cimarex (XEC) and Viropharma Inc. (VPHM).

Volume matters because high volume stocks allow for better options selection and narrower bid/ask spreads. Options matter  because they provide leverage, which boosts profits.

I don't like to trade opens with open interest below three figures, and four figures is much better. Three of the issues -- OCN, XEC and VPHM have several strike prices with three-figure open interest.

VPHM has the highest success score and the lowest volume, and that's the first issue I'll look at.

Viropharma Inc. is an Exton, Pennsylvania biotech company that operates globally with a focus on specialty products that, in the company's words, "support patients with serious diseases for which there is an unmet need".

The price of VPHM stock on Monday broke above its high of the last 20 days -- $24.64 -- and continued to rise today. The breakout came on the fifth day of an upleg that began from $22.12 on Dec. 31.

The stock is still correcting from its February high, and it would take a push above $31.36 to produce a higher high on the weekly chart that would count as a strong uptrend.

Since January 2009, seven out of 10 price-channel breakouts by VPHM have resulted in profitable trades, with an average gain of 13%. Upside breakouts, like the one on Monday, have resulted in winds 77% of the time, with an average gain of 20%.

The overall score -- the breakout success rate times the average yield -- is 9.2, and the upside score is 15.7.

These are far higher numbers than I'm seeing with highly liquid stocks, with average volumes above 2 million shares, where the scores tend to peak at 5.0 or 6.0, tops.

Analysts tracking VPHM are positive about its prospects, with their collective enthusiasm rating coming in at 19%.

Viropharma's return on equity is respectable but not spectacular, at 9%. Long-term debt is on the low side, amounting to 20% of equity.

Quarterly earnings are all over the map, without out a trend. The company showed losses in the last two quarters but was profitable in the 10 prior quarters.

Earnings have surprised to the upside in five of the last 12 quarters, and to the downside in seven.

Institutions own 66% of shares, and traders have bid up the stock to a quite expensive level. It takes $3.50 in shares to control a dollar in sales.

VPHM on average trades 705,000 shares a day. The options strike price selection is adequate but not great. Open interest in the 100 and 200 contract range is tightly concentrated near the money in the front month.

Front-month at-the-money call options have a  12% bid/ask spread, which is quite high in the world of highly liquid stocks but not unusual in the mid-volume issues like VPHM.

(Spoiler: While writing this post,  I opened a bull put option spread with a February expiration. It took 10 minutes to get a fill, and to get filled at all I had to back off my asking price a bit as I negotiated with the market maker. The open interest was 609 contracts for the short leg ($25 strike) and 233 contracts for the long leg ($22.50 strike). It worked, but I really feel as though I'm navigating through a strange new world populated by bizarre illiquid beasts.)

Options are trading well below their five-day average volume: Just 36% of the average for calls, and a mere 5% for puts. This is not a very active day.

Implied volatility stands at 36%, the lowest level of the past six months. It has been declining since Jan. 3.

Options are pricing in confidence that about two-thirds of trades will fall between $22.65 and $27.85 over the next month, for a potential gain or loss of 10%, and between $24 and $26.50 over the next week.

The fair price zone on today's 30-minute chart from from $25.17 to $25.44, encompassing 68.2% of transactions surrounding the most-traded price, $25.32. The stocks is trading near the floor of the range. an hour before the close. Nearly all of today's price rise came in the first half-hour of trading.

Viropharma next publishes earnings on Feb. 25.

Decision for my account: As noted above, I've opened a bull position on VPHM, structuring it as a February bull put spread, long the $25 put and short the $22.50. This makes the trade profitable at expiration down to $24.25, for a 4% cushion. The potential yield is 23%.

If the price continues to rise, I'll add to the position either as long May call options or as shares. The May options only have double-digit open interest, and that could be an issue for me.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing the tool.) A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found 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.

FB: The numbers behind a bull signal.

Facebook Inc. (FB) gave a bull signal on Friday, breaking past its 20-day high of $28.75.

It's not a trade for me because FB publishes earnings on Jan. 30, meaning that we're within my moratorium on opening new positions within 30-days of a future earnings publication.

Even so, FB fascinates (and infuriates) me, and with the stock having average volume of  57 million shares, I clearly have a lot of company.

So, let's  run some numbers.

FB started trading last May, so there's not all that much history. The stock has had eight 20-day price-channel breakouts, five to the upside and three to the downside.

Of those breakouts, 43% overall were profitable, with an average return of 12.2%. The upside breakouts showed a success rate of 25%, with an 8% average return, and the downside signals showed a 67% success rate, for an average gain of 14.3%.

The scores -- combining the success rate and the average return -- come to 5.2 overall, which is at the high end, but only 2.0 for bullish signals. Bearish signals give a stunning score of 9.6.

So, clearly, history shows FB has a bias toward the downside.

With those numbers, I doubt that I would trade FB to the bull side, even without the looming earnings announcement. A downside breakout, on the other hand, would be pretty much a no-brainer.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing the tool.) A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found 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.

APC: An oil exploration breakout

Anadarko Petroleum Corp. (APC) on Friday closed above its high price of the last 20 days, $77.35, and is still trading above that level today, confirming the bull signal under the Turtle Trading rules.

The upswing broke past a sideways range that has been in effect since July, with a ceiling a bit above $77 and a floor just below $66. That pause is part of a broader swing to the upside that began in early June from $56.42.

The prior upswing peaked at $88.70 in February, and that level arguably constitutes major resistance for APC.

In the past four years, about seven out of every 10 breakouts by APC have been profitable, with the average return being 8.7%. Half of bullish breakouts have earned money, with an average return of 10%.

In sorting breakouts for a possible trade, I combine the trade success rate and the average profit into a combined score. In the case of APC, the overall score is 5.7, and the upside breakout score is 5.0.

To put it in perspective, the 15 breakouts on Friday by highly liquid stocks had overall scores ranging from 5.2 down to 1.6. Anything above 5 is at the higher end of the range.

APC has a trend score of 60. It is calculated by taking the percentage of higher lows in the five trading days proceeding the breakout, and then adjusting that by the distance traveled in those days. It is a way of estimating the strength of the push beyond the price channel.

APC's trend score is not particularly high. The scores for Friday's 15 breakouts ranged from 210 down to 40.

However, APC has been profitable 7 times out of 10 with a low trend score (below 1), for an average return of 8.8%.

One challenge facing traders these days (aside from the budgetary Hunger Games in Washington) is the beginning of the 4th quarter earnings announcements. Alcoa Inc. (AA) kicks off the season after the close on Tuesday.

Under my rules, I don't open a new position in a stock within 30 days of an upcoming announcement. Since APC announces on Feb. 4, it will take a slight bending of the rules (mea culpa!) to allow a trade.

Analysts are certainly bullish about APC's prospects, with a collective 68% enthusiasm index.

Anadarko Pete, based in a Houston, Texas suburb, The Woodlands, is an international fossil fuels exploration and production company with more than 2.5 billion barrels of oil equivalent in its proven reserves.

The company's return on equity is an unspectacular 8%, and long-term debt is reasonable, although a bit higher than I like, at 61% of equity.

Earnings, although positive the past 11 quarters, have shown a large degree of volatility, as is to be expected with an oil and gas company. The results have steadied somewhat in 2012.

Of the past 11 quarters, nine have surprised to the upside and two to the downside.

Institutions own 81% of shares and have bid up the price so that it takes $2.83 in shares to control a dollar in sales.

On average, APC trades 3.1 million shares a day, providing sufficient liquidity to support a wide range of option strike prices, with open interest on my strikes in the four- and five-figure range. The bid/ask spread on front-month at-the-money calls is 2.9%.

Implied volatility stands at 32%, near the low end of the six-month range. It has been falling since Dec. 31.

Options are pricing in confidence that nearly two-thirds of trades will fall between $71.43 and $85.73 over the next month, for a maximum potential gain or loss of 9%. The implied range over the next week is $75.15 to $82.01.

Trading in options is a running 28% above the five-day average volume for calls, and 7% above average for puts.

The fair-price zone on today's 30-minute chart runs from $77.75 to $78.71, encompassing about two-thirds of transactions surrounding the most-traded price, $78.39. Five hours before the close, APC is trading slightly above the most-traded price but within the zone.

Anadarko next publishes earnings on Feb. 4. The stock goes ex-dividend in March for a quarterly payout yielding 0.46% at today's prices.

Decision for my account: I've opened a bull position in APC, bending the trading rules slightly to accommodate the earnings date. I structured the initial position as a bull put spread, long the $75 February puts, and short the $71.50 Februaries. This gives me a profitable trade down to $74.41, with a potential top yield of 19.1%.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.) A discussion of recent modifications, which haven't yet been incorporated in the original write-up, can be found 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.

Thinking about trading methods

The dirty little secret of the markets is this: Most trading is based on faith, not in a higher power but in the received wisdom of the great analysts who came before.

Do we trade on the fundamentals? We follow the wise men Benjamin Graham and Warren Buffett.  Or maybe even the wise guy Jim Cramer.

The relative strength index, the most widely used indicator in the world? J. Welles Wilder is the source of wisdom.

Elliott Waves? We take Robert Prechter as our guide.

Perhaps we prefer the Turtle Trading method, which is the basis of the way I trade? We know it works because Richard Dennis and his disciples told us so.

Whatever we do as traders, we do it because we've been told that it works. Which seems like a sorry state of affairs for women and men seeking to make their fortunes rationally in the maelstrom that is the markets.

The emphasis is on "rational". It is, in my opinion, irrational to make trading decisions based on faith. Sola fide is a very poor principle for the purpose of making money. Faith in trading, without the works to to back it up, is a fast track to failure.

The methods of those wise men (and they are all men for some reason) are enshrined in brokerage and charting software used around the world.

We are even reluctant to change the standard time periods used in the analysis. Wilder's RSI and other indicators tend to use 14 days as the period of analysis? What's so special about 1-4/5 weeks? We don't care. It's the default, so we use it.

When Wilder developed the RSI in the 1970s, 14 days was a period that worked for him. But 1978 was long ago and far away. The markets of 2013 are a different sort of beast, with shorter holding periods than anyone dreamed of 35 years ago.

The same can be said for all of the popular trading schemes. They've been around a long time. They are hoary with age.

Moreover, when I read about the popular methods, the testing tells me how they did against the market as a whole, but not against any individual stock that I might be interested in. Does anyone for a moment believe that the price of AAPL behaves the same way as that of SO? Or of FB? Or of APLL?

Private traders (what some call "retail traders") have up to now had little choice but to trade on faith. It takes data to do custom analysis. Data cost a lot of money.

Happily, the price of data has come down in recent years and big data can easily be incorporated in a trader's information base without adding much to the overhead of trading.

I'm working with a database of daily stock prices from the NASDAQ, NYSE and AMEX exchanges -- Open, high, low, close, volume -- dating back to the start of 2009, about three months before the market's recession low. As of today, I have 7,460,837 records to work with. Since each record has five pieces of information, that means I'm working with 37,304,185 data points.

I think that's enough data to draw some interesting conclusions from, but I'll need to work with it to see for sure. Time will tell.

(Intraday data is also available, but it is more costly, and I'm always mindful of the overhead in my trading operations. I considered it, but in the end decided it was unnecessary to support the way I rade.)

During the past four weeks I've written software (using the coding language perl as my platform) to apply a version of my Turtle Trading rules to the data, identifying 213,958 breakouts beyond the 20-day price channel.

The most obvious thing to do with the data is to follow the sports and elections quant Nate Silver by calculating the odds of success. From my data, I know the number of  breakouts, and I know how many of those were profitable. I also know the average percent profit on the profitable trades. And I can analyze this further by breakouts to the upside and to the downside.

And there is much, much more.

It is often said that in the markets, past performance doesn't determine future returns. But it is also said that prices tend to revert to the mean.

These are contradictory statements. For what is the mean if not the record of past prices? What is reversion to the mean if not past prices influencing future returns?

That is the underlying assumption of my way of analysis (and, in fact, of all technical analysis).

My version of the Turtle Trading rules can be found here. I've made some changes from those in order to analyze my daily data.

One change is in the time frame. Under the rules I have been using, when a breakout occurs intra-day, I wait 30 minutes, and if the price is still beyond the breakout level, I enter the trade. With the daily data, I'll be analyzing breakouts from the prior trading day, and entering the next trading day if the breakout signal remains valid.

Second, I won't be using the RSI or any other auxiliary indicator as confirmation. The analysis is pure Turtle, except for the time delay.

Third, for this analysis I've chosen to use the classic Turtle measure of success or failure: The price moving beyond the 10-day channel in a direction opposite the trade. For my operations up to now, I've modified that by using a trailing stop/loss equal to twice the average daily trading range. And in practice, I may still do that. But for analytical purposes -- for now at least -- I'm calculating success and failure based on the 10-day channel rules.

There were 15 breakouts of highly liquid stocks, all to the upside, on Friday, Jan. 4. I'll be looking at those today, and picking the best to analyze, bringing my new data capabilities to the table in making a trading decision. Look for a posting to come.

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: A Week of No Significance.

I once read a book titled, 1587, A Year of No Significance. Substitute "week" for "year", and the appellation could be applied to the economic reporting this week. There just isn't a lot there.

In fact, there is but one monthly report report scheduled that in theory has market-moving capacity: International trade, out Friday at 8:30 a.m. The United States last had a trade surplus in 1975, and has been a negative deficit ever since.

So, the report tends to be surprise-free. Frankly, I don't recall when I last saw this report have an impact all on its own.

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.

Other reports of interest:

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

Friday: Import and export prices at 8:30 a.m., and the Treasury budget at 2 p.m.

Fedsters

Richmond Fed Pres. Jeffery Lacker, a member of the money-policy-setting Federal Open Market Committee, speaks Tuesday at 1:30 p.m..

Two FOMC alternates have scheduled appearances, both on Thursday. Kansas City Fed Pres. Esther George speaks at 12:45 p.m., and St. Louis Fed. Pres. James Bullard at 2 p.m.

Trading calendar

By my rules, as of Monday I'm using February options for the short legs of spreads and April options for single calls and puts and the long legs of spreads. Of course, shares are good at any time.

Good trading!

After the Cliff....

OK. Let's all put on our "I fell off the Fiscal Cliff and lived!" t-shirts, bask  in the happy glow for a day, and then move on.

The deal passed by the House on Tuesday means that the next crisis will happen at the end of February, when Treasury runs out of extraordinary measures to pay the nation's bills absent an incease in the debt ceiling, and Congress must take a scalpel to the budget in order to impose budget cutting by meat axe.

The Associated Press wrote on the subject on Jan. 1 -- read it here -- and House passage of the final deal last night changes nothing in the analysis.

I've written before of my strange reluctance to put my financial well-being in the hands of John Boehner and Harry Reid, and even President Obama.

So I treated the present "crisis" the way I would a suspect earnings announcement -- I reduced my market exposure to a minimum in an effort to avoid the unforecastable.

I can assign odds of a successful trade when the price Apple's stock breaks above its channel. But I can't assign odds to the psychological and political interplay of Boehner, Reid & Co. (For example, there this fascinating behind-the-scenes account from Politico of how personal the crisis negotiations became.

In practical terms, my avoidance strategy meant that I didn't trade the January options, which expire in a bit more than two weeks.

Going forward, the political calendar gives me a chance to trade the February options without too much risk of a Washington melt-down destroying my holdings' value.

The Februaries expire Feb. 15, a couple of weeks before the do-or-die point in the next crisis. So for my own account, my intention is to resume trading on Thursday, using vertical credit spreads expiring in January for my initial positions.

I'll make a decision in early February, based on how the politics are playing out, whether to exit the markets almost entirely when the Februaries expire, or to continue on with plays on the March options.

I say almost entirely because I shall retain my insurance puts -- deep out-of-the-money put options expiring in January 2014 that I hold as insurance against major systemic risk.

Different subject: In The Week Ahead I said that I would roll out a new set of analytical tools today (Wednesday). That won't be happening after all because of a problem I've found in the perl code that generates reports. My new goal for the rollout is Monday, Jan. 7.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)

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.

The Week Ahead: Jobs, Leading Indicators

The first week of 2013 will be dominated by the last release 2012 jobs data, on Friday at 8:30 a.m. Eastern.

The employment/unemployment report is, overall, a trailing indicator, although it includes one important leading indicator. Also, look for two more leading indicators, from the Institute of Supply Management manufacturing survey, out at 10 a.m. Wednesday, the factory orders report, released Friday at 10 a.m.

My theory is that it is the leading indicators that count -- the rest of the economic indicator zoo is just for entertainment -- so this is a big week for traders trying to peer into the misty future.

The U.S. central bank will kick off the year in monetary policy by release Federal Open Market Committee minutes from the Dec. 12 meeting at 2 p.m. Wednesday.

The week will see the customary prelude to the jobs report, with the payroll company ADP's employment report released on Thursday at 8:15 a.m.

The markets will be closed Tuesday for New Year's Day, the one totally global financial holiday of the year.

If Congress fails to act, Wednesday will be the first workday after across-the-board U.S. government budget cuts kick in -- the Fiscal Cliff -- and also after the U.S. hits its debt ceiling, although the latter will be mitigated by some fancy footwork at the Treasury Department to buy a few months extra time.

Also this week, we at Private Trader will bring some new analytical tools online. My goal is to roll them out on Wednesday Monday, Jan. 7.

Leading indicators out this week (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, moved to Friday 4:30 p.m. because of the holiday, from the Federal Reserve.

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

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

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

Vendor performance -- the delivery time index -- from the ISM manufacturing survey, at 10 a.m. Wednesday.

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. Friday.

Other reports of interest:

Monday: Dallas Fed manufacturing survey in Texas, 10:30 a.m.

Wednesday: Motor vehicle sales throughout the day, purchasing managers index just before 9 a.m. and construction spending at 10 a.m.

Thursday: Challenger job-cut report at 7:30 a.m. and  petroleum inventories at 11 a.m.

Friday: Monster (.com) employment index of online job demand, time unspecified.

Trading calendar

By my rules, as of Monday I can trade February short vertical spreads as well as April single options and straddles. Of course, shares are good at any time.

Happy New Year, and good trading this week and throughout 2013!

The Week Ahead: Christmas Week

Christmas Week will have only four trading days, and one of those will see an early close. Even so, the  Merry Old Elf who sits in a drab basement room within a non-descript, vaguely offical-looking building grinding out economic data will keep up the good work, sliding three housing reports plus a few other goodies down the market's chimney, although after the Christmas feast.

The U.S. markets will be closed on Tuesday for Christmas Day, and will close at 2 p.m. Eastern on Monday, the day before Christmas.

Of the major forex money centers -- London, New York, Tokyo and Sydney -- only Tokyo will be operating all five days of the week, and even Tokyo will be slowing down with the approach of New Year's, Japan's biggest holiday.

Congress may return on Thursday for more work on a budget settlement. Or not. It's all up in the air at this point as the national stagecoach careens out of control toward the Fiscal Cliff.

New home sales will be released by the Realtors on Thursday at 10 a.m. Eastern. This is the smaller part of the housing market -- most sales are to someone other than the original owners -- but it's an important indicator of how much (or whether) the housing market is recovering.

On Tuesday, the S&P Case-Shiller home price index will provide a detailed look at housing prices in 20 metro areas across the U.S. Housing is the most local of commodities, and this report has the ability to reveal trends masked by the national numbers. Out at 9 a.m.

The third housing report is the pending home sales index, to be released by the Realtors on Friday at 10 a.m. It tracks transactions where contract has been signed but deal hasn't closed yet.

Leading indicators out this week (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, moved to Friday 4:30 p.m. because of the holiday, from the Federal Reserve.

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

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

Other reports of interest:

Thursday: Consumer confidence from the Conference Board, at 10 a.m., and petroleum inventories at 11 a.m.

Friday: Chicago purchasing managers' index, at 9:45 a.m.

Trading calendar

By my rules, as of Monday I can trade January short vertical spreads, butterfly spreads, iron condors, and the short legs of calendar and diagonal spreads, as well as April single options and straddles. Of course, shares are good at any time.

Merry Christmas, and good trading!

Silver: Where's the glitter?

The iShares Silver Trust exchange-traded fund (SLV) fell below its low price of the past 20 days, on the fifth day of sharp slide.

The decline produced a trend score of 175% of the average daily trading range, which is far from a rout but is still a serious decline.

I construct the score for a bear signal based on the percentage of lower highs recorded on the daily chart during the five days prior to the breakout, combined with the distance traveled, close to close, on those five days.

The huge Vancouver, B.C., silver mining company Silver Wheat Corp. (SLW) closely tracked the metal itself in the decline. It showed a trend score of 144% of the average daily trading range.

In the case SLW, 80%  of the days saw a lower high, and the distance traveled was down $1.42.

One difference between the two is that SLV fell on higher volume, and SLW's volume has declined throughout the fall. Generally, I consider a fall on high volume to be more of a rout -- people fleeing -- and a fall on declining value to show a lack of interest, which is a milder condition.

SLW is an alternate way to play the metal. A mininng company can have earnings surprises that impact give higher volatility to the chart. It also pays a small dividend.

A mining company also has far better better analyst coverage than does a metals ETF, so I can learn that SLW's analysts are quite bullish on the company, with a 70% enthusiasm index. The metal? Who knows. It isn't tracked in the same detail as a corporation is.

On the other hand, SLV -- the metals ETF -- can be considered an index option, with favorable tax implications for profits.

For the rest of this discussion, I'll focus mainly on the metal, since it has the stronger trend score, but will toss in a few comparisons with the mining company. Frankly, my personal preference for the simpler play. A company is subject to all sorts of vagaries, such as mismanagement. A metal? Not so much.

News reports suggest the main reason for precious metals' fall was a robust GDP report. The Bloomberg News story can be read here, but the gist of the argument is: Economic growth means less stimulus means higher value for the dollar against other things, such as a precious metals.

Silver's fall is more about the dollar's rise, since the dollar is where the Fed's policy impact will fall.

SLV on average trades 10.6 million shares a day, making it far more liquid than SLW, which trades 3.1 million shares.

The iShares Silver Trust has a huge selection of option strike prides with near-the-money open interesting runing to four and five figures. The front-month at-the-money bid/ask spread on puts is 3%. Actually, Silver Wheaton's spread runs 2.4%, a marginally better deal.

SLV's implied volatility stands at 28%,  below the mid-point of its six-month range. It began to rise on Dec. 18. SLW's implied volality is higher, at 40%, which makes it the better choice for selling options, such as in short vertical spreads.

Options on the metal play, SLV, are pricing in confidence that 68.2% of trades over the next month will fall between $26.45 and $31.17, for a potential gain or loss of 8%, and between $27.68 and $29.94 over the the next week.

Volume on SLV put options is running 66% above the five day average, and for calls, 4% above the average.

Today's half hour chart on SLV, with three hours of trading remaining, shows a fair-price zone of $28.68 to $29.06, encompassing 68.2% of transactions surrounding the most-traded price, $28.84. SLV fell into that zone in the second half hour of trading and has stayed there ever since.

SLV, of course, has no dividends or earnings announcements. Silver Wheaton next publishes earnings on March 13. It goes ex-dividend in February for a quarterly payout yielding 0.82% annualized at today's prices.

Decision for my account: I've placed a hold on trading until Washington works out its budget and debt-limit deal. I'm just reluctant to place my future fortune in the hands of House Speaker Boehner and President Obama. Nice guys, I'm sure -- Barrack and Michelle sent me a Christmas card -- but still...

If I were trading, I probably would wait before taking the SLV or the SLW trade. Both showed a serious downside gap this morning, suggesting much of the price move might already have happened. I would want to see what happened on Friday.

Another consideration would be that the year-end holidays are close, with the consequent lowering of liquidity as traders stay home for Christmas and New Year's. It's just not a good time to be trading because there are fewer counter-parties around to take the other side of my positions.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)

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.

DHI: Congestion worthy of the flu

The Fort Worth, Texas homebuilder D.R. Horton Inc. (DHI) broke above its 20-day high of, coincidentally, $20 today, swinging into bull phase under my trading rules for the first time since early September.

Horton operates in 25 states and 73 metro markets, so its fortunes rise and fall with the national housing market. No coincidence, the real-estate exchange-traded fund XRT also entered bull phase today.

Of the 10 stocks and ETFs that I analyzed today, only DHI had an acceptably strong trend, scoring 132% of its average daily trading range.

The stock has been in a sideways trend since mid-November, with a floor of about $18.27 and a ceiling of $20. This level marked a decline from a prior sideways trend running from mid-September, with a floor of $19.73 and a ceiling of $22.79.

This means congestion worthy of the flu season, as DHI tries to push higher.

All of the autumnal Sturm und Drang comes as a correction to a stunning run up from $8.03 in October 2011 to $22.79 last September. I say stunning because, remember the recession? Remember all of the angst about the housing market not leading the recovery as it has in the past? Somehow, DHI didn't get the memo.

And if DHI didn't get the memo, analysts haven't read the chart. Their aggregate enthusiasm index stands at a negtative 33%, a level that is known in the business by the technical term "Ew! That sinks!"

Admittedly, Horton's return on equity isn't a real standout. It stands at 8%, not awful but not often the mark of a company that is going places. On the plus side, debt is quite low, amounting to only 5% of equity.

Quarterly earnings have been meandering and small, with two losing quarters out of the last 12. The 3rd quarter of 2012 had a huge one-time "non-cash benefit" that bumped earnings up to the stratosphere, but that's not significant in judging the business for my purposes.

Nine of the quarters surprised to the upside, and three to the downside.

Institutions own 88% of shares and have bid up the price a bit. It takes $1.48 in shares to control a dollar in sales.

DHI on average trades 5.7 million shares a day, sufficient to support an excellent selection of stock option prices with open interest near the money in the four figures. The front-month at-the-money bid/ask spread for calls stands at 2.4%.

Implied volatility stands at 40%, near the middle of the six-month range, and has been mendering sideways since mid-September, initially with wide swings, but those have narrowed considerably since mid-November.

Options are pricing in confidence that about two thirds of trades will fall between $17.77 and $22.37 over the next month, for a potential gain or loss of 11%, and between $18.96 and $21.18 over the next week.

Call options are trading slowly, at only 14% of their five-day average volume. All of the action is on the put side, where volume is 23% above the five-day average. This looks to me as though traders are betting on the downside.

The entirety of the breakout happened in the first hour of trading today. Since then until this writing two hours before the close, the price on today's half-hour chart has been seesawing in a narrow range near the top of the fair-price zone, with runs from $19.87 and $20.11, encompassing about two-thirds of transactions at the most traded price, $20.05.

Horton next publishes earnings on Jan. 23. The stock goes ex-dividend next March with a quarterly payout at today's prices yielding 0.75% annualized.

Decision for my account: I've put a hold on my trading and reduced exposure sharply until the budget and debt-ceiling negotiations are worked out in Washington. 

Even if I were trading, and even though DHI has met my rules for a bull trade, I wouldn't take the trade today. The high put volume compared to calls and the fact that the price hasn't budged since the first hour of today's session gives me pause, big time.

A mentor once told me that success in trading is defined by whether the trader followed the rules (whatever rules he or she might have devised). My decision violates my rules. So, in penance, I shall hang my head in contrition as I sip my second pot of green tea, muttering to myself, "I am a bad, bad trader."

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)

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.

The Week Ahead: Housing, Witches and the End of the World

Housing dominates the economic reporting this week before Christmas, with a scattering of reports tracking other areas to add sauce to the mix.

Housing starts, out Wednesday at 8;30 a.m. Eastern, is a leading indicator for the real-estate sector. A housing start is when the shovel first bites dirt. Other housing reports are existing home sales on Thursday at 10 a.m.

There are also a pair of lower impact housing reports. Earlier in the week, look for the Homebuilders housing market index at 10 a.m. Tuesday, and later in the week, the FHFA house price index on Thursday at 10 a.m.

Other major reports: A final revision of the 3rd quarter gross domestic product on Thursday at 8:30 a.m., followed by the Philadelphia Federal Reserve Bank's survey of the business outlook in the mid-Atlantic region at 10 a.m.

On Friday, durable goods orders and personal income and outlays will both be released at 8:30 a.m.

Of high importance to many traders: Friday is the last day to trade the December options, which expire on Saturday. Friday, in fact, is a quadruple witching day, the last trading day before stock index futures and options, stock options and single-stock futures expire.

Shakespeare got by with only three witches. The markets need four, which no doubt says something profound about the way our world works.

Oh, and I almost forgot. Friday is also the end of the world, as the Mayan calendar ends the Long Count that began 5,125 years ago. I suppose that would mean the expiration of all options, even the Januaries and Februaries. Even the LEAPS.

Leading indicators out this week (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, moved to Friday 4:30 p.m. because of the holiday, from the Federal Reserve.

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

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

Building permits for new private homes, from the housing starts report at 8:30 a.m. Wednesday.

University of Michigan/Reuters index of consumer expectations on Friday at 9:55 a.m.

The Conference Board index of leading indicators, which aggregates all of individual leading indicators into a single index, will be released Thursday at 10 a.m. It is not itself considered to be a leading indicator, and has a low potential for moving markets, but there are those of us who love it.

Other reports of interest:

Monday: Empire State manufacturing survey of business conditions in New York, 8:30 a.m., and the Treasury Department international capital report, tracking foreign capital movements into and out of the U.S. economy, at 9 a.m.

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

I also like to keep an eye on the Baltic dry index of world shipping, updated daily.

Fedsters

Richmond Fed Pres. Jeffrey Lacker, a member of the Federal Open Market Committee, speaks Monday at 12:30 p.m.

Trading calendar

By my rules, as of Monday I can trade January short vertical spreads, butterfly spreads, iron condors, and the short legs of calendar and diagonal spreads, as well as March single options and straddles. Of course, shares are good at any time.

Good trading!

JCP: Suspect breakout

The retailer J.C. Penney Co. Inc. (JCP) has broken above its 20-day high, $19.79, and continues to push higher on a leg that began Dec. 5 at $17.10. that leg is part of a slightly broader uptrend that began Nov. 16 from $15.69, reversing a downtrend lasting since mid-September.

The breakout happened on Thursday, followed by a pullback, and then another break above the 20-day high that has been continued today up to $21.50 (so far).

The chart raises a perennial question for traders who make their living off of price reversals: When is a breakout not a breakout.

The stock has been on the decline since Sept. 20, with a few relatively shallow retracements to the upside. The slide has lasted long enough that the 20-day high is also declining, day-by-day, in an echo of the month-old price decline.

So, looking purely a price reversal levels, the current breakout means precisely nothing. There is no near-term resistance that it has punched through. The breakout level is just an arbitrary pebble in a featureless fall.

The nearest  break above resistance is at $27, quite a distance away.

Unlike the classic Turtle Trading rules that my trading rules are based on, I treat all breakouts as suspect. Any breakout must prove to me that it is in fact based on price and not just an arbitrary span of time. Twenty trading days is four calendar weeks. What makes that special?

On the other hand, the breakout has a good tail-wind behind it, with a trend score of 107% of the average daily trading range. Anything above 100% deserves to be considered seriously, in my book.

J.C. Penney is a household name and so its business model needs ot explanation. It's not among the glitterati of retailers, but it sells good, solid products, and what's not to like about a store where my grand-daughter's  great-great-great-grandmother might have bought her dresses.

Analysts, however, are less impressed with the history. In aggregate they give JCP a negative 63% enthusiasm rating.

And the long-term chart supports that assessment. The stock has been executing a large sideways move since the beginning of 2009, ranging from below $20 to above $40. Obviously, there's money to be made from such wide swing, but the chart really isn't going anywhere.

Nor are the finances. J.C. Penney has a negative return on equity of -8%. The debt isn't awful, standing at 84% of equity.

The company has reported accelerating losses the last three quarters. Like all retailers, JCP makes its money mainly in the the 4th quarter. The 2011 4th quarter was profitable but still down from the year-ago quarter.

Of the past 12 quarters, eight have shown upside surprises, and three -- the unprofitable ones -- have surprised to the downside, meaning the losses were worse than analysts expected.

Institutions own nearly all of the shares, and price -- no surprise -- is cheap. It takes 31 cents in shares to control a dollar in sales.

JCP on average trades 9.8 million shares a day and supports a wide selection of option strike prices, with open interest mainly in the four figures, sometimes in five, and extremely narrow front-month at-the-money bid/ask spread on calls of only 1%.

Implied volatility, at 77%, is high, in the upper half of the six-month range, and has been in an uptrend since Nov. 30.

Options are pricing in confidence that about two-thirds of prices will fall between $16.65 to $26.17 over the next month, for a potential 22% gain or loss, and between $19.13 and $23.69 in the next week.

Options are trading very actively today, with calls running 60% above their five-day average volume, and puts at 180% above the average. Note the preponderance of bearish put trades compared to bullish call trades in the direction of the breakout. Yet another cause for caution.

The fair-price zone on today's half-hour chart fruns from $21.13 to $21.49, encompassing about two-thirds of transactions surrounding the most-traded price, $21.36. The price moved up to that level after 90 minutes of trading, and remains there with three hours of trading left in the day.

J.C. Penney next publishes earnings on Feb. 27.

Decision for my account: I'm not trading this week as I await a resolution of the budget talks in Washington, and more important, negotiations over the debt ceiling.

Even if I were trading, I would not take this trade based on the fact that the breakout signal doesn't map on the chart to any true move beyond resistance. The abysmal financials and vicious opinion of analysts simply reinforces that decision.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)

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.

GME: Game on

GameStop Corp. (GME), the video game retailer  headquartered in the Dallas suburb Grapevine, Texas, broke above its 20-high of $28 today, moving into bull phase under by trading rules.

There was no shortage of breakouts today, but only two were trending with enough strength to draw my interest. GME had a five-day trend score of 180% of its average daily trading range. The other was the chemical giant E I Du Pont De Nemours and Co. (DD), a bullish breakout with a trend score of 139% of range.

The breakout came during the last leg of an uptrend that began in August at $15.32. The six-day rise from $25.40 to $28.19 (so far today) followed an eight-day fall that, under my rules, put the stock back in neutral phase.

So the breakout means that its game on in an ongoing game. Forget the analytical niceties -- GME is in an uptrend, and under Newton's 4th Law of Motion, a stock in motion remains in motion until traders and analysts get bored.

(Newton on a stock bubble of his day: "I can calculate the movement of the stars, but not hte madness of men.")

Despite the rise, analysts aren't showing the stock a lot of love, collectively giving it an enthusiasm index of precisely zero. One way to interpret that is "Don't love it, don't hate it, don't care".

The financials, however, are quite good. GameStop, with more than 6,600 stores in the U.S., Australia, Canada and Europe,  shows a return on equity of 14%, with no long-term debt.

As is always the case with retailers, the 4th quarter, which includes Christmas, is where the money is made. The last two 4th quarters for GameStop have shown higher earnings per share compared to the year-ago quarter. Of the past 12 quarters, ten have shown upside earnings surprises and two surprised to the downside. All were profitable.

The stock is a darling of institutional investors, yet the stock price is dirt cheap -- it takes but 38 cents in shares to control a dollar in sales.

GME on average trades 2.7 million shares a day and supports an excellent selection of option strike prices, most in the front month with four-figure open interest. The front-month at-the-money bid/ask spread is 3.4%.

Implied volatility stands at 41%, near the floor of the six-month range. Options are pricing in confidence that about a third of trades will fall between $24.63 and $31.21 over the next month, for a potential gain or loss of 12%, and between $26.34 and $29.50 in the next week.

The fair-price zone runs from $27.78 to $28.05 on today's 30-minute chart, encompassing about two-thirds of transactions surrounding the most-traded price, $27.91. The price was trading above the zone but has dropped back to the most-traded price with 45 minutes left in the trading day.

GameStop next publishes earnings on March 18. The stock goes ex-dividend on Nov. 26 for a quarterly  payout yielding 3.58% annualized at today's price.

Decision for my account: I'm not entering into new positions at this point as we wait for the politics of budgeting and debt to percolate in Washington, D.C.

If I were trading, I would note that the price has dropped below the $28 breakout level. I would open a position if the price moved above $28 again, initially selling a bull put spread, short the January $26 put and long the January $25 put. 

That structure puts the breakeven point at $25.72, below my standard stop/loss, $26.46 in this case, calculated as the entry price less twice the average daily trading range. The maximum yield is 22%

If the price continued to rise, I would add to the position using long April calls with a delta of about 70.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)

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.