In my October 16th, 2015 Seasonal Forecaster newsletter, I focused on a trade setup in Cal-Maine (CALM) stock. I stated “Cal-Maine, one of the largest egg producers, is a company with good fundamentals, a good seasonal track record for this time of year, and appears to be under accumulation. Even though their past three earnings reports have fallen short of expectations, the stock remains near all-time highs and appears ready to break upwards.”
CALM's seasonal pattern showed a track record of strong gains over the next 10 weeks – an average of 26% a year (yes, there was one year, 2003, that produced a huge gain, and that affects the average, but even removing it, it is still good). But the ‘win rate', the percentage of years that produced gains, was kind of low at 67%. When using seasonal analysis for trade selection filtering, I usually look for win rates of 75% or greater.
However, I noticed that the track record in recent years was better – most of Cal-Maine's losses over the next 10 weeks were in the early years. The company has made itself more attractive to investors in recent years. Focusing on the past 12 years, CALM has had only 2 losses, for an 83% win rate. And those two loses were minor compared to many of the gains.
I continued, “This is not a sexy stock. When you are taking your kids around on Halloween, and Bill, that annoying guy down the street, answers the door and while the kids are getting their treats, mentions he [was] loading up on that new social media stock that IPO'd and asks what you're trading, you'll look sheepishly at the ground and say ‘eggs'. But like Hormel, when the rest of the market is weak, it is the unglamorous stocks, the ‘basic products that everyone uses' stocks, that tend to do the best.”
“CALM is attractive at current prices. The highest probability trade would be if CALM broke above resistance from previous highs at 60.”
“I would consider a covered call, to lower the cost basis on the stock and give some income in case it takes a while to break upwards. With CALM at 56.78, and CALM November 60 calls trading around 1.02, if CALM reached 60 by November 20 (November option expiration day), this trade could return 7.6%, which would be 78% annualized. Add in the upcoming dividend, and you could have a nice trade.”
So I added CALM stock to the Season Forecaster portfolio at Friday's open price of 56.93.
Apparently I wasn't the only one who thought it was time for CALM to break out. By Monday's close, CALM had gained 11%:
The stock broke above resistance to new all-time highs, on high volume. Coupled with the fact that Cal-Maine was due to pay a $0.983 per share dividend to holders of CALM stock on October 28th, this 'embarrassing' trade turned into a great trade. When trick-or-treating, anyone who is in CALM stock can now proudly say “Eggs!”.
Once again, seasonal analysis, the study of strong past participation of institutions in certain stocks, brought a great trade candidate to the surface.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, please click on the following link: www.markettamer.com/seasonal
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Gregg Harris is the Chief Technical Strategist at MarketTamer.com.
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