Williams Companies, Inc. (WMB) seems well positioned for a short. From a fundamental perspective it is expensive when using the S&P 500 as a measure. It is currently trading at 51.66 times trailing PE and 22.65 times forward PE. From a technical perspective the chart is forming a rounding top while approaching long term technical resistance. It is interesting to see the ATR (0.50) in this issue in contrast to the beta (1.40).
This is of course enough to cause some people to act. However, without the block activity there is no compelling reason to establish a position long or short. I say this to once again illustrate the importance of large blocks and heavy aggregate volume.
The blocks which have traded from May of this year until now, indicate (at least to me) that Williams Company has been extensively distributed along the ridge of the current trading range. My suspicion is that the Designated Market Maker for this issue is very patient. Knowing exactly where this issue is headed eliminates the need for him to act out of urgency. Stock exchange insiders can and do use patience as a tactical weapon in their arsenal to outlast the average investor.
It can be challenging to negotiate this market when one considers the inadequacies of standard prescriptive analytical systems. This is because the talking heads discussing market variables intentionally exclude the most important variable. When was the last time you heard any of them mention a large block transaction? Conflict should not exist between common sense and sound theory, since sound theory to some degree is vested in common sense. You must consider the possibility that the media and the exchange are trying to draw your attention to or away from something.
As paradoxical as it may seem, we need to help the Designated Market Maker achieve his overall objectives. Remembering all the while that if given the opportunity he will not hesitate (for an instant) separating us from our capital. Pity the poor soul who contends with a market he does not need to contend with and has fewer resources than necessary to effectively do so.
Even though we are all interested in achieving consistent, effective performance we must never lose sight of the fact that it is a comprehensive understanding of the essentials which makes it possible in the first place. In this way we can distinguish the timeless from the temporary.
What is immediately obvious from the blocks in the provided matrix is that this issue does not trade blocks of this magnitude frequently. This would imply that major merchandising activity is taking place and that serious price consequences must follow. I anticipate a move to the downside.
On the basis of the foregoing, these are my views and observations:
The Trade:
I recommend establishing a short position in Williams Companies. Open your short position (First Sell) with only ¼ of whatever capital you intend to commit to Williams Companies at $32.66 or better. Cost Average (Second Sell) the remaining ¾ of the position at $35.27 and stop out at $36.66. Do not post your stop loss. I have said it before but it is so important that at the risk of being redundant and in an abundance of caution I will say it again. It is too easy for the Designated Market Maker to cash investors out by moving the price above or below your stop out and move the price right back up or down again. In addition, when a stop out is triggered it converts into a market order and that could be disastrous if the DMM decides to really take advantage. Remember the “Flash Crash“? I would be looking to cover this position with a downside price target of $28.82.
There is always the possibility that the trade may not work out.
There Is Never A Sure Thing (particularly on a short)
Investors must realize and recognize that there is never a sure thing. Sometimes events that have a low probability of occurring bring forth very serious consequences should they come into being. Investors must judiciously consider what the inherent practical limits are and how much they stand to gain in relation to the risks involved in establishing any position.
In addition, persistence can become desperate folly by allowing a losing position to become a viable argument for deciding on a new position. Rather, such decisions should be based on the current and soon-to-be circumstances.
Any position in which one unexpected factor has a significant impact on your portfolio is the result of poor planning. It is a fault most commonly associated with people who want to explain away their losses. SUN TZU – Art of War “Use an attack to exploit a victory, never use an attack to rescue a defeat.”
If you follow the process recommended and the trade does not work, the overall loss in this model is $3,000.00. That amounts to .003 of the overall portfolio (theoretically valued at $1,000,000).
Finally, never be a brave and brainless investor because a fool and his money are soon parted.
A portfolio of $1,000,000 should position size in the following manner:
This is a trade, not an investment. Be ever vigilant.
Disclosure: This is a trade, not an investment. Be ever vigilant. See Performance Tracking here.