Abercrombie: Range Bound

If you've watched CNBC for any lengthy period of time, you've probably seen a commercial for "Channeling Stocks" (or something similar-sounding) that promotes the trading of predictable, range-bound stocks.

I do not subscribe to or endorse such a service, but I've been successfully trading a "channel" stock myself - Abercrombie and Fitch (ANF).

Below is a chart of the last year and a half of trading; it's blatantly clear that Abercrombie is now range-bound.For a year and a half, ANF has bounced between about $72 and $82. Starting with the dip in December 2006, there have been five rise-and-falls.

I love ANF's long-term prospects (and do plan to own them for the long run), but with a stock like this, buying and holding through the rise and falls is poor management of one's portfolio. If you bought in at $67 in Dec '06 and held until now, you would have made 20% - congratulations. However, if you would have bought each time it came close to the 30 line on the RSI (top indicator) and sold every time it got close to the top, you would have executed 5 trades that each would have generated more than 10% of gain. Lets run some math quickly:

Say you're investing $1000. In 2006 you could have purchased 15 shares, which you could have sold Friday for $1200. However, if you traded more often....

• Buy 15 shares in 12-06, sell in 02-07 when it crossed the 70line on the RSI. 15 shares sold at 80 then = $1200.
• Buy in around $72 in March when it touches the oversold barrier, and get 16 shares (with $50 left over). Sell in late April when it touches the overbought barrier around $80 (conservative price) and net $1280, plus the $50 on the sidelines.
• Buy back in late June around $72, buying 18 shares (and having about $30 left over). Here, you could have stocked up more later (now seeing how this strategy works) at an even lower price later. Once again, even if you conservatively sold at $80 (not at $82 or $85, which the stock did hit), you'd net $1440, with $1470 total in the fictional account now.
• Buy again at $72 in November, getting 20 shares and having $30 left over. Sell again at $80, a month later, and bring in $1600.
• The latest buying opportunity was the start of this year, when it was below 70 as it touched the oversold line. With the $1630, 23 shares could have been bought. Though it's still not oversold, if you sold at $80 on Friday, you would have cashed out with $1840.

If you had bought and sold, you would have ended up with an 80+% return. Buying and holding produced a laughable 20% gain. (Sarcasm - but the point is, look how much better you could have done.)


All of my entry and exit points in the example above were a few dollars too conservative, because it is unrealistic to expect one to buy and sell at the absolute lows and peaks. (If you're using a discount broker like TradeKing, commissions are only $5 each way and pretty much neglitable, as long as you're trading at least $500 of stock each time [and I took that into account when I rounded with each example trade]). But I have successfully executed this trade three times now, because it has been so predictable. One can confidently use the $72/$82 range, or simply trade with the RSI. Each time I've done this trade, I've sold the position with a stop-limit that I place at $78 when the stock goes above $80, $80 when the stock goes to $82, and $82 when the stock is above $83. It hasn't failed yet.


But I do only close the positions through stop-limit because I expect ANF to break out of the upward limit of the range one day. Abercrombie is a sold company, and the stock was especially resilient when most retailers (and most stocks) were crumbling over the past six months. Abercrombie is expected to continue to grow at 15% over the next 5 years, and it's only trading at 14 times next year's earnings (both stats according to Yahoo! Finance).

I'm not sure that now is the time that ANF will make it to $90 or $100 (because of recessionary fears, consumer constraints, and generally-bad sentiment), but who knows. Maybe consumers will decide to go buy a $50 polo shirt with their rebate checks. Also, lots of market cheerleaders (most notably, recently, Jim Cramer) have been going gaga for retailers as they have rallied recently. The stock is now at $82 and barely above 50 on the RSI, so based on momentum, it doesn't look like it will pull back yet. I'd like to see the price moderate a little in the next week, so it can make a push past $85 without bursting through the overbought barrier.

The moral of the story? With a good company like Abercrombie, buying and holding will create good returns, but buying and selling at predictable points can generate exceptional gains.


"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

Last Week Review

Last week was a very big week for me; my positions in my portfolio changed significantly.

I sold my long position in Hovnanian, as it was up 50% in three sessions, to a price that I felt was inflated. (So far, I was correct, as the price has fallen almost $2 from when I executed my sell order).

I was also long in some Hovnanian 12.5 September calls, which thankfully, I was able to sell for a nice little profit. I also had some Abercrombie 80 September calls, which I sold for a little more than break-even.

I'm looking to re-initiate a long position in a homebuilder at some point, once the market settles down a little bit - with earnings being reported from a couple builders this week, the potential volitility is a little more than I am comfortable with. I may or may not choose Hovnanian again; I might choose a safer play. as Hovnanian is probably one of more-endangered builders. However, I still do think HOV will not go bankrupt, and it will trade at two, three, or four times today's price, but I don't know if I want to reintroduce that risk to my porfolio now.

In other news, Syntax-Brillian (BRLC) finally bounced a little bit; I initiated long-term options position $2.50 calls, expiring January), increasing my exposure to the company with some deep-in-the-money, limited-risk calls.

Heelys (HLYS) also finally had a few positive sessions; once again, I reiterate that the company currently looks fundamentally cheap. It's a very long-term hold.

Now that I've pretty much eliminated all short-term plays from my portfolio... its time to get a new one! And for the first time in my life, I'm looking to go short and/or buy puts.

Look at the next post for what I'm thinking about.

Christmas in December: Fed Aftermath

Investors that held long positions as of 2:14 Tuesday should appreciate Mr. Bernanke's decisions. The interest rate cut catalyzed a rally that has now lasted two sessions and 3-4%.

I personally can thank him for some investing success. I had purchased September calls for Abercrombie (ANF) and Hovnanian (HOV) about a month ago, when they were both close to the respective strike prices (80 and 12.5). In the month, they were flat or down, and my options were going to expire worthless.

However, Mr. Bernanke came to the rescue and surprised the market with a 50 basis point cut. Both Abercrombie and Hovnanian shot up, and the contracts became in-the-money. (Interestingly, I half-jokingly predicted with almost 100% accuracy the Hovnanian gains; read my post here.)

Anyway, just because I should disclose this anyway, I sold my options in both Abercrombie and Hovnanian, and I sold my equity position in Hovnanian today with a well-executed stop-loss order. For the record, I still love the homebuilder's prospect's for the future; I will be looking for a lower reentry point sometime very soon. However, I feel the run-up to 15 was largely unmerited and a bit of a chain-reaction, so I'm currently waiting on the sidelines for things to settle down.

Thanks to Mr. Bernanke, my personal portfolio was up 10% on Tuesday, and I am now exactly even for the quarter. (Prior losses in Hovnanian, Syntax-Brillian, and others had hurt my performance).

Looking ahead, I am uncertain; the crystal ball that I used to predict the rally Tuesday is now out of commission. I watched Mad Money tonight for the first time in a while, and Cramer predicted that this is just the beginning of a huge bull market. I can't say that I agree with taht statement; with still-unresolved (and possibly still worsening) housing/credit problems in the United States and Europe, I don't think the world markets are financially sound enough to have an organic, fundamentally-based rally. The euphoria from the interest rate cuts may last a few more sessions, then people will probably start to profit-take.

My advice? Keep your eyes on the long-term prize. I'm long Toyota (it's the biggest position in my portfolio, at about 20% of assets). It is down a couple bucks from where I bought it in the middle of the summer, and frankly, I'm not too sure it's going to go up significantly anytime soon (due to the possibly-weakening economy, tight credit, etc). However, I'm 97% sure that in two or three years, based simply on fundamentals, Toyota could easily be a $200 stock.

Trying to profit from volatility is tempting, and if you succeed, congratulations. But if you look at the world's greatest investors - people like Warren Buffet - they seek out great values, and great companies, and reap great returns.