Here’s When Your Highest Percentage Trades Will Occur

  • July 9, 2003
  • Rob Hanna

With
mergers and buyouts all of a sudden in the news, I
thought I would look at Roadway, which
Yellow 
(
YELL |
Quote |
Chart |
News |
PowerRating) announced yesterday
that it was buying for $48/share. Below is a one-year chart of Roadway
(
ROAD |
Quote |
Chart |
News |
PowerRating).


In looking at the chart, if I
was a purely technical trader, and active in Roadway, there is some likelihood
that I could have been short in ROAD going into yesterday. As you can see, most
of the patterns I see on this chart signal it is headed lower. (Note:
Yesterday’s long white candle should really be a gap up — it opened near $46,
and would have provided no opportunity to cover.)

So with all this technical evidence that the stock could go lower, why wouldn’t
you have wanted to consider shorting it?  Fundamentals.  Let’s take a look at a
few of the things that would have made Roadway attractive to longs from a
fundamental perspective:

Earnings:  Roadway had increased its EPS last year, was on track to
do it again this year, with forecasts to increase EPS by an even larger
percentage next year. The quarterly year-over-year earnings were up at least 40%
the last three quarters. All this translated to an EPS Rating of 96 from the
TradingMarkets’
stock scanner.

Valuation Ratios: 
Before yesterday, the P/E Ratio on Roadway was about 11.7, compared to a 30.7
for its industry, and 37.7 for the S&P 500.  Roadway’s P/S Ratio was also well
below both the industry and S&P’s averages, and it’s ROE was higher. Based on
these popular ratios, the stock was not overvalued in the least. As a matter of
fact, it was undervalued, and likely somewhat attractive to value managers.

When making decisions on possible
trades to take, it is important to look at both the technical and fundamental
picture. Your highest percentage trades will occur when both agree. Insist on
taking only those trades with the best risk/reward ratios. It may help to keep
you out of potentially disastrous situation, like Roadway would have been for
short sellers.

When you sell short, look for stocks with poor earnings and high valuations. 
For those people who would like more information on possible fundamentals to
check for short positions, I would suggest studying

Mark Boucher’s downfuel criteria. 

After spending all that time writing about the short side, I will say that the
market is still much friendlier to longs right now. Breadth has improved,
breakouts are following through again, and things are continuing to look up. The
Nasdaq broke through resistance Monday, but this was not accompanied by the Dow
and S&P. Moves in these indices above the June highs would most likely spark a
new leg up for the market. As I write this around 12:30 p.m. ET, the indices are
all down on the day with volume coming in slightly higher than yesterday. One
day of mild distribution, if that’s what this turns out to be, would not concern
me greatly.

Lastly, earnings season will really kick into high gear next week. Make sure
your are aware of when all your stocks and potential candidates will be
reporting. Make a list or a calendar for yourself over the weekend, if you
haven’t done so already.  No need to take on undue risk right before earnings
are released.

Good Trading,

Rob Hanna



robhanna@rcn.com