Murphy Oil Corp. (MUR) - Split Candidate. Traders added to previous
positions from near 76.28 as MUR moved over 81.40 on Thursday. Friday
it closed at 86.45 on heavy volume as news was released of successful
deep-water drilling efforts in the Gulf of Mexico. Total possible
profits on this trade are 13.33%. We suggest pulling up your stops to
protect profits and adding to positions if shares move over 87.75.
Alternatively, go long on a bounce near 81-83. A split announcement
could come at anytime. Optionable.
Express Scripts, Inc. (ESRX) - Split Candidate. Traders got long on May
4th as shares bounced near 85.10 and took quick profits a day or two
later as it hit highs near 89. Friday, shares rallied nicely in the
final 30 minutes of trade to close at 90.10, just below its high of the
day. We suggest going long over 91 or on a bounce near 87. We expect a
split announcement at the upcoming shareholders meeting on May 23rd.
***********************************
SPLIT CANDIDATE SUMMARY
***********************************
Target Last Annc.
Company Name (Sys) Date (Event) Split @ Price
------------------------ ------------- -------------
Kohl's Corp. (KSS) 05/22 (Earn) 03/00 @ 77
Fannie Mae (FNM) 05/22 (SHM) 1996
Express Scripts (ESRX) 05/23 (SHM) 10/98 @ 78
A.G. Edwards (AGE) 06/20 (Earn)* 08/97 @ 40
CEC Entertainment (CEC) 06/22 (SHM) 07/99 @ 41
Legg Mason, Inc. (LM) 07/24 (BOD) 07/98 @ 62
Amerada Hess Corp. (AHC) TBD No Previous
Murphy Oil Corp. (MUR) TBD No Previous
XL Capital Ltd. (XL) TBD No Previous
Jacobs Engineering (JEC) TBD 1991
***** LEGEND ******
Last Split@annc = The date and price at its last split announcement.
Wk = Week
TRO = Turnover ratio
TBD = To Be Determined
BOD = Board of Directors Meeting
SHM = ShareHolder's Meeting
Earn = Earnings
* = Estimated date
***********************************
NEW SPLITS ANNOUNCED
***********************************
Krispy Kreme Doughnuts, Inc. (KKD) - This stock changed its ticker
symbol as of Thursday. The company that was trading under the ticker
KREM moved to the New York Stock Exchange under the new ticker KKD.
Traders have been in long positions from 40.24 and 43.50, and added
shares as the stock moved over 51 on May 9th. A high of 52.75 was hit
the following day before a pullback may have inclined some profit-
minded traders to stop out with gains of over 30%. Remaining traders
took profits before earnings were announced this past Wednesday. KKD
reported that 1st-quarter net income rose 89% on sales of $140 million.
Fiscal 2000 reflected profits of 0.55 per share, which are expected to
grow to 0.78 in 2001. To boot, the company announced a 2-for-1 stock
split to be executed on June 15th. All this from a company that IPOed
just over one year ago and boasts that it sells 6.4 million doughnuts a
day. Traders ran with the earnings news and split announcement, pushing
shares up to a 63.85 close Friday, a gain of 14.66 or 30% on the week.
Volume was enormous. The stock looks a bit extended so look to enter
long on a pullback and bounce near 56. Aggressive traders can go long
over 65.15 if KKD continues flying higher, but be ready to exit quickly
on weakness. Optionable.
Split Exec Rec. Annc. Annc.
Company Name (Symbol) Ratio Date Date Date Price
------------------------- ------- ----- ----- ----- -------
Krispy Kreme (KKD) 2-for-1 06/15 05/29 05/18 $59.38
***********************************
UPCOMING SPLITS
***********************************
IVX executes its split prior to the market open on Monday, effectively
completing its pre-split run.
Split Exec Rec. Annc. Annc.
Company Name (Symbol) Ratio Date Date Date Price
------------------------- ------- ----- ----- ----- -------
IVAX Corporation (IVX) 5-for-4 05/21 05/01 04/23 $32.77
STT has pushed over its resistance, while BAX has reached new highs.
DGX is trending nicely upwards.
Split Exec Rec. Annc. Annc.
Company Name (Symbol) Ratio Date Date Date Price
------------------------- ------- ----- ----- ----- -------
State Street (STT) 2-for-1 05/31 04/30 12/21 $123.00
Baxter International (BAX) 2-for-1 05/31 05/09 02/28 $91.03
Quest Diagnostics (DGX) 2-for-1 06/01 05/16 02/22 $101.39
PKI has broken out of its basing pattern and is moving higher. GENZ and
COLM are both having trouble moving over resistance, while WFMI and XTO
are trending nicely upward.
Split Exec Rec. Annc. Annc.
Company Name (Symbol) Ratio Date Date Date Price
------------------------- ------- ----- ----- ----- -------
PerkinElmer Inc (PKI) 2-for-1 06/04 05/15 01/30 $91.20
Genzyme Corp (GENZ) 2-for-1 06/04 05/24 04/25 $105.00
Columbia Sportswear (COLM) 3-for-2 06/05 05/17 05/02 $70.21
Whole Foods Market (WFMI) 2-for-1 06/05 06/04 05/11 $50.39
Cross Timbers Oil (XTO) 3-for-2 06/06 05/23 04/11 $26.63
***********************************
TRADERS CORNER
MORE IDEAS ON SETTING STOP LOSSES
***********************************
Last week we covered some of the basics of setting stops and today
we'll continue by digging into the subject a little deeper.
Stops are the trader's first line of defense against a trade that turns
against you. Traders with longer time horizons will typically use much
looser stops than those day traders will, so the perfect stop is not
the same for everyone. As traders we are looking for stops that will
take us out of a position before we incur significant losses, but keep
us in a trade if the stock is just wavering slightly before moving
higher.
It's usually best to set stops just below some type of support. At the
end of last week's article, we discussed how we use support from the
various daily moving averages (DMAs) to help in setting stops. When
setting stops the trader must try to identify the most significant
support levels near the current price of the stock. At times the DMA
will look like the strongest support and at other times a trend line or
specific price level may provide stronger support.
Trend Lines and Specific Price Support
Support levels are easier to identify and more reliable when a stock is
trending higher than when it has confusing and inconsistent patterns.
Sometimes the moving averages give the stocks their trend line and
sometimes the trend appears unrelated to the DMA.
Note that if you buy a stock when it is breaking out to new highs,
setting your stop at support may mean that you'll take quite a loss by
the time the stock drops to that level. Intermediate and long-term
traders who intend to set their stops at one of these support levels
should consider buying on a bounce off support rather than buying
breakouts. Buying breakouts is a momentum player's strategy. Very short
term momentum traders often watch the stock as it climbs higher,
setting a close trailing stop mentally, ready to pull the trigger the
moment that the stock slows or reverses its momentum. If that makes you
nervous, consider going back to step one to reconsider your investment
time horizon.
Sometimes the best stop is the one set just below a specific price
level. You may find that when a stock's price falls to a certain price
level, demand increases and buyers begin to buy. This creates a "floor"
or support level. In contrast, you will find instances where a stock's
price rises to a level where demand decreases and owners begin to sell.
This is the "ceiling" or resistance level. The more times that the
stock has bounced from a specific price level, the better the support.
When you see stocks that seem to have little or no real consistent
trend for any period of time, look to see if they tend to bounce back
and forth between specific support and resistance points. If they do,
these stocks can present great plays for short-term traders who buy
just as the stock bounces off support. Set your stop loss based on the
daily trading range and continually move it upward using a trailing
stop (see below) until it approaches resistance. Then tighten your
stop. Once stopped out, wait for the next bounce off support and then
repeat the process. Some traders will try to double the benefit on
these range-bound stocks by going short as the stock bounces down from
resistance and long on the bounce off support.
Tight Stops and Trailing Stops
As mentioned above, shorter-term traders normally use tighter stops.
Using tighter stops translate into smaller losses if the stock turns
south, but also increases the probability that you'll get jiggled out
on a quick drop before the stock climbs higher. While these "unwanted"
exits are frustrating, they are just a part of the game for the short-
term trader. It certainly doesn't mean stops aren't worth using.
Remember, if the stock's outlook turns positive after you have been
stopped out, you can always buy the stock back.
We often use the term, "Trailing Stops" in the Right Line report. A
trailing stop is a stop that you move upward as the price of a stock
appreciates. In effect, you initially use a stop to minimize losses and
as time goes on, the trailing stop protects your gains. Note that you
most brokers don't actually allow you to set an automatic "trailing
stop." With most brokers, you set a stop, then as the stock
appreciates, you cancel your prior stop and replace it with another
higher stop, moving it up as soon as possible to cover your initial
investment, then higher to protect your profit.
Some Pointers on Using Stops
1. Decide before you buy where you will set your stop.
2. Once you determine where your stop will be, calculate how large your
position size can be so that you will never risk more than 2% of
your trading capital in one trade.
3. Set the stop the instant your buy order gets filled.
4. Move stops up as the stock rises, first to break even, then to
protect profits. On a long position, NEVER lower a stop - only raise
it.
5. As the stock moves up sharply, and looks like it may be "topping
out" or if market conditions become unfavorable, tighten your stop,
which will effectively employ an "up or out" strategy.
Different Stop Order Types
Note the difference between a stop-loss order and a stop-limit order.
We recommend using "stop-loss orders" rather than "stop-limit orders."
A stop-loss order is a sell order that will automatically turn into a
market order to sell if the stop price is hit. A Stop loss order turns
into a Market order to sell when the stock's price reaches the stop
price that you've set. This means that the stock will immediately be
sold at the best available market price, regardless of what that price
is, once your stop price is reached. If what you really want is to sell
a stock if it falls to $X, you must use a stop market order.
A stop-limit order is a sell order that turns into a limit order to
sell at a predetermined price after the stop price is hit. A limit
order says in effect that you will sell only at a certain price or
better. If the stock is dropping quickly or is gapped over, you may not
be filled at your limit price and the stock could continue to plummet,
with you still holding your shares. Keep in mind that a Stop Limit
order may not fill even if the stock reaches the limit price, since all
limit orders are filled in sequence by the exchanges. If the price
changes before the exchange reaches your order-due to the number of
previous orders, or your order size-your order may not fill. Stop-limit
orders are often not available to on-line traders unless they pay more
and/or run the trade directly through one of the brokers available by
telephone.
More Pointers On Setting Stops
Another strategy is setting a stop below the previous or current day's
low price. This technique is more effective on stocks with low
volatility. It is a short-term approach for those who don't like to set
wide stops. Once in a profitable position, some intermediate-traders
may consider widening the stop loss or lessening the "trail."
When you look at the chart of a stock, try to see which type of support
and resistance has been strongest in the past. Probably the most
important question you should ask yourself is, "Where would I expect
the stock to bounce up from?" The answer usually gives you a price
level just above where you should set your stop. For any stock, there
will be a few points that make reasonable stops. Which point you decide
to use will depend on your individual time frame, assumptions and
situation. With experience you can recognize these exit points and
improve your chances of setting a successful stop. Ultimately, we hope
that you spend less time "groaning and complaining to your computer
screen," and more time doing the things you enjoy.
Sometimes using stops isn't appropriate. Remember that a stop will not
protect you if the price gaps through the stop. A negative news release
after the close can force a stock sharply lower in after-hours trading.
It becomes obvious that in the morning, the stock will open way below
your stop level. If you leave the stop in place, then the stop order
will instantly turn into a market order when the stock opens below your
stop level. Stocks that have a big gap down like this typically open at
the low of the day then can bounce back. In this case, it's best to
cancel the stop order before the open. Then after the open, you can
reset the stop just under where the stock opens and move it up as the
stock rises. You will still be down, but may avoid being taken out at
the day's low.
In today's discussion, we've assumed traders were buying long positions
rather than going short. When going short, the same concepts apply, but
in reverse.
We suggest that traders investigate reading material on the important
topic. We like Dr. Elder's "Trading for a Living." It's a great
reference that belongs on every trader's desk.
***********************************
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