Looking for a long-term trade? Watch this setup today
Autonation vs. Carmax
When you are looking at longer-term trades be careful not to buy a falling
knife. As a trader you are not trying to buy the low of a spread, just some
places close to it. Be cautious and wait for some signs that the trend might be
over before you try being a contrarian. Here we look at Autonation
(
AN |
Quote |
Chart |
News |
PowerRating) and
Carmax
(
KMX |
Quote |
Chart |
News |
PowerRating) to see how after a gap the spread has found some support,
creating a potential entry.
Starting with the fundamentals:
| Â | AN | KMX |
| Market Cap | 5.3 B | 3.2 B |
| P/E | 13.59 | 27.71 |
| P/TB | 3.51 | 3.8 |
| P/FCF | 19.51 | – |
Based on the information presented Autonation
(
AN |
Quote |
Chart |
News |
PowerRating) is the
stock we are buying and Carmax
(
KMX |
Quote |
Chart |
News |
PowerRating) is the stock we are selling.
Here is a chart of the spread over the last quarter:
The spread gapped to a low of approximately -$5.5 towards the
end of August. It has slowly been filling in the gap while forming higher lows.
This is a good sign and can allow us to try and play the trend.
Standard trend following systems can apply here with an exit
based on the fundamentals coming closer to neutrality. Buy the pull backs as
long as they don’t form new lows.
For more information visit our website at
www.pairtrader.com
Darren Clifford
Darren Clifford is a professional equities
trader with Bright Trading. Mr. Clifford has recently been ranked one of the top
30 traders under 30 by Trader Monthly magazine.
Mr. Clifford holds a masters degree in Economics from Simon Fraser University
specializing in Financial Mathematical Modeling. He is also the president of
www.pairtrader.com, company dedicated to
providing the tools and data necessary for hedged equity trading.