Tenet Healthcare Corp. (THC) Looks Vulnerable to Downside

eSignal Chart w/my custom indicators

 Tenet Healthcare Corp. (THC) stock price is looking vulnerable to the downside.

Technical Analysis:
1) lower peaks, lower troughs
2) RSI divergence most recent new high
3) Relative under performance of stock price vs SPY

Fundamental News Analysis:
1) 6/27/13:  Fitch Ratings Report states that hospital companies are experience systemic shifts in care delivery. Persistent weak trends in organic volume growth...

2) 6/24/13: THC agrees to acquire VHS for $4.3 billion including debt in a deal.  THC offer $21 a share, 70% premium over previous day's close of $12.37.

LiveVolPro Chart

3) 6/6/13 Deutsche Bank upgrades THC due to prospects for THC to acquire other hospital chains (previous close $44.37).  4/10/13: Deutsche Bank had downgraded THC (previous close $43.52)

4) 4/29/13:  THC moves sharply higher on a pair of upgrades from Baird & UBS (upgrade comes after 1Q earnings announcement, closing price $43.84)

So basically, current price of $43.17 is below the stock prices of days where most recent analyst upgrades came.  More significantly, THC has Long-Term Debt / Equity Ratio of 5.55 as of 1Q 2013 balance sheet compared to UHS Long-Term Debt / Equity Ratio of 1.29.  This is prior to THC announced takeover of VHS and plans to take on more debt.  The recent significant spike and uptrend in interest rates cannot be good for THC's financials moving forward.

Finally, the announced one-year delay in Obamacare's employer mandate is also seen as a blow to short-term stock price momentum.

In terms of options pricing, the Realized (30-day) Volatility Indicator has been declining and last value was 40.65.  However, for the past few months, realized volatility has averaged around 45.  The implied volatility of August 43 strike options stands at 43.5, so I would say August IV is slightly cheap, considering August is an earnings month.  THC announced its earnings report date to be August 6, 2013.

Volatility Strategy:  Buy August 43 straddle and scalp gamma into earnings.
Directional Strategy: Buy the Aug 43/39/37 broken-wing put butterfly for 1.03 mid-point value.

Introducing My Technical Analysis Framework For Options Trading.

I remember 10 years ago when I first entered the world of options market making.  Prior to that, I had traded equity index futures and had become pretty proficient with technical analysis.  I remember though instantly losing credibility upon mentioning "technical analysis" in options circles in those days.  I wonder if it is still the case...

Technical analysis, however, is much more than chart pattern reading.  Technical analysis is really THE physical means to perceive what is metaphysical--price, markets, volatility, greed, fear, etc.
 
In options trading, one must be aware of price behavior or speed and volatility, just as much as price direction.  What better way to do so than through a technical analysis framework that allows one to perceive any market in multiple dimensions.

The first chart lists all the indicators that go into my options trading framework.  The indicators are as follows:

1) Price Dimension

a.      candlestick price chart

b.      log scale in Y-axis

c.      trend lines, trend channels

d.      moving averages

e.      Relative Strength Index

2)      Time Dimension – Intraday, Daily, Weekly, Monthly.  Daily period chosen here.

3)      Volume Dimension – Volume at Price Indicator

4)      Volatility Dimension

a.      Trend/Range Gamma Indicator

b.      Implied Volatility Indicator for Gold futures (if available, in this case $GVX)

c.      Realized Volatility Indicator, my custom method to calculating 30-day historical volatility

5)      Correlation Dimension – Inter market Ratio (Gold to Silver)

 

 The trading rules are rules-of-thumb but are as follows:

1) Delta - Determine the trend, determine confidence of direction, and determine how much leverage through delta one would want to apply.

2) Gamma - If Trend/Range Gamma (TRG) Indicator crosses above its lower or upper Bollinger band lines or the moving average line, look to see if price breaks above or below a short-term resistance or support.  At this time one would look to be long gamma.  On the flip side, if TRG indicator crosses below its moving average line, one would look to be short gamma.  The confidence of leveraging gamma would be determined by choosing the appropriate expiration dates of options.

3) Vega - If realized volatility indicator and/or an implied volatility indicator are at low end of its 3-month, 6-month, or 1-year ranges AND are starting to rise, then look to be long vega.  On the flip side, if RV or IV is at high end of its 3, 6, 12-month ranges AND are starting to fall, then look to be short vega.  The confidence of leveraging vega would also be determined by relative value of implied volatility to realized volatility, as well as, implied volatility level differences between options with different expiration dates.  To determine this, one would need an effective indicator to calculate "fair value" of future expected volatility.

The second chart explains how all the indicators provide an aggregate picture and means to anticipate future price behavior.

The holy grail in trading (arguably) is not to predict the direction of price in the future but rather be able to determine whether prices would move in a trend or move within a range in the immediate future.  TREND or RANGE?  If we knew this, we could simply switch to and follow buy/sell signals from the appropriate indicators.

 

TREND or RANGE?  Options traders try to answer this question just as much as stock or futures traders, but in the options world, the language is "long or short gamma".  The third chart shows instances in the market where being long or short gamma using options would have been optimal (at least for gold or GLD).

So why not combine insights from both the directional trading and volatility trading worlds?  Yes, volatility trading may require a more quantitative approach, but I do not see one world as being "better" than the other.  For those traders that follow a more discretionary approach, volatility indicators would provide a way to perceive price along another dimension.  Is not greater awareness just perception through multiple dimensions?

I would highly appreciate feedback.  Is this technical analysis framework for options trading just a compilation of ubiquitous indicators?  Or an insightful methodology to trade options?


Additional content and research can be found in Technical Analysis on Volatility (My Conceptual Framework).

VIX & VXX After the FOMC Announcement 6-19-2013

Usually ahead of important, potentially market moving events, volatility gets bid.  The chart above shows how VIX rose ahead of both the Greek Elections in June 2012 and ECB announcement in Sep 2012.  With VIX elevated ahead of tomorrow's FOMC announcement, it is likely that VIX will fall after the announcement.

I believe the FED deliberately introduced uncertainty to monetary policy in May's meeting to "take away the punch bowl" in some markets that were showing froth.  Having had the desired effect, I believe that tomorrow's policy announcement would be all about reassuring the markets.

The more appropriate question may then be, to what level would VIX fall if a drop is the likely outcome?

For those of you that have been keeping up with my blog posts, I have a methodology that calculates a "fair value" of VIX.  1) I estimate the appropriate Implied Volatility level based on realized volatility of the SPY, looking at both EGARCH values from http://vlab.stern.nyu.edu/analysis/VOL.SPX:IND-R.EGARCH or calculating my own realized volatility value.  2) I refer to my median VIX analysis to determine the appropriate VIX median value ranges depending on whether SPY is in an uptrend or downtrend.

Fair Volatility Estimate Indicator was developed to give me a simple graphical representation of the above analysis.  Based on chart analysis and FVE indicator (left), VIX is likely to fall to 14.5 - 15.0 level on condition that SPY would not fall below its 20-day moving average level of 164.43.

If VIX were to fall to 14.5-15.0, then VXX could fall to 18.8 - 19.45 based on an average 15% premium VIX July futures would trade over spot VIX with 20 trading days to go before July expiration.

DEFLATION--Are Markets Signaling The Dreaded Scenario?

Are the markets signaling DEFLATION ahead?  Japan is trying their high-risk experiment to inflate.  While their efforts seem to be working initially with the Yen collapsing and Japanese equity markets soaring, there is growing concern that their efforts would ultimately lead to failure.

I look at multiple markets, and I'm noticing a pattern that is eerily reflective of overall markets that is concerned about deflation ahead.  Gold prices plummeting is puzzling because usually precious metals perform well under periods of deflation.  We definitely need to keep an eye out for and be mindful of potential weakness in housing and real estate sector.  Strength in these sectors have been the foundation for prospects for improving US economy and reflation of assets prices.

Average Oil Futures Price Chart:  Oil prices plunging

JJC Chart: Copper Prices plunging

TLT Chart: Long-Term Bonds Rising

Corn Futures Chart:  Grain prices plunging

XLP Chart: Consumer Staples sector outperforming

XLV Chart:  Healthcare sector outperforming

Gold Futures Price Chart:  Gold prices plunging, but this is a
tricky one because gold prices usually outperforms in periods
of deflation

XHB Chart:  Definitely need to keep an eye on home

building sector because if US home prices start to fall, that

would signal really troubling times ahead.

IYR Price Chart:  The same goes for real estate sector.  Keep

an eye out for real estate sector weakness

VIX is Undervalued.

The S&P500 Index is moving into record highs and is showing very bullish action.  No way to say how high the equity market could go.  However, based on our proprietary volatility indicators, the momentum of realized volatility on the S&P500 Index is rising.  The S&P500 Index is also moving at a 13.55 realized volatility, while VIX currently is at 12.80.

The realized volatility indicator shows what an appropriate ATM IV of May options could be.  Since VIX on average has 12% premium over ATM IV levels, fair value of VIX should be around 15, regardless of whether the index is moving up or down.

The May VIX futures is trading now at 14.60, naturally at a premium over VIX, but 14% premium is also lower than the 18% premium on average, VIX futures trade with over 5-weeks to go before its expiration.

Executing a ratio call spread, selling the VXX May 19 call and buying 2x VXX May 21 call for under 0.40 debit wold be a good risk/reward strategy and gives you exposure to volatility over the next 2 weeks through big chunk of earnings season without too much risk.

New Paradigm

I'm going to present my thoughts that may be considered way out there...

Complexity theory took hold in economics in the 90s, especially the theory about increasing marginal value or utility(IMV), which turned conventional wisdom of decreasing marginal value upside down. In short, dominate (info, money, power, influence,etc) and set the standards and one could reap ever greater rewards.

This paradigm shift (IMV) and its ultra competitive underpinnings spread to every thread of the fabric of society at the micro level, which in turn set the unintended norm for the macro level--a vicious cycle not only acceptance of, but reverence for those that reaped the highest rewards without questioning whether or if any real value was created and/or how much of the social fabric was destroyed in the process. Societies' value (hence valuation) systems broke down.  In fact, this outcome is exactly what complexity theory models also predicted.

Since the near catastrophic end-game that was the financial/economic crisis of 2008-09, I believe another paradigm has been gaining traction in both the micro and macro levels--that is the theory of a holographic universe. Basically, everything is connected and everything is part of a greater whole. I'm not just pushing some new age, spiritual nonsense. I see it in every scientific discipline and research, in global economic and political policies, in the corporate world, in entertainment, etc.

I do not know what would be the end results of this new paradigm shift, but I have to believe it would be more positive and constructive then IMV.  I'm talking about 10-20 year bull market here... Yes, my outlook is far-fetched, but why not have a vision?

How does one monetize this vista?

Sell assets that have risen due to fear. That would be gold, long-term bonds, anytime VIX spikes. Buy portfolio of assets that are in the business of strengthening connections (human, corporate), perhaps GOOG(YouTube), FB, IACI(match.com), EBAY, media & content firms, crowd funding, etc.  Avoid firms that have traditionally try to profit from transferring costs to society, just to name a few off the top of my head... 


As a side note...ever wonder why "Gangnam Style", song and music video by PSY, a mid-30s, out-of-shape Korean rapper, shattered the record for the most watched You Tube video (over 1.3 BILLION+ views) and became a global phenomenon?  PSY said it himself.  His music, dance, and video focuses on participation and not exhibition.  They allow people to laugh and connect and be in the moment as the actors themselves.  This is completely different than entertainment from just a few years ago when people felt disconnected and perhaps even empty admiring or being envious of the so called "stars".

Options Market Tip 1-16-13