Bristol-Myers Squibb: What Goes Up Must Come Down

Jun.14.12 | About: Bristol-Myers Squibb (BMY)

Sir Isaac Newton must have had Bristol-Myers Squibb (NYSE:BMY) in mind when he created his famous first law, stating that a body in motion remains constant unless the body is acted upon by an external force. In this case, the body in motion is the advancing price of Bristol-Myers Squibb and the external forces are the blocks that impact the trajectory of the issue. This could also be expressed in coefficient of determination calculations (R2) for vectoring mean reversion. In this case, it all boils down to being in the right place at the right time with respect to position and momentum.

So from Newton's perspective, the price of Bristol-Myers Squibb should continue to rise until acted on by an outside force. Here the outside forces were the blocks in the matrix provided. You can see from the chart how they impact the price movement. The data provided is a small subset of the overall mass of data that I collect, organize, and evaluate. That said, there are many blocks that are not included because of space limitations. Quite literally, some issues have hundreds of thousands of trades.

I believe Bristol-Myers Squibb is going lower for two to three points in the short term, and then will most likely continue to advance. Although the 6,569,340-share trade on June 7 at $34.25 is substantial, I do not believe it will exert enough "force" to cause more than a short-term move of a few points. Most investors would be satisfied to leave well enough alone, but in this case it presents a nice opportunity for a quick 5% gain. This is a quick trade for those nimble enough to execute it.

Bristol-Myers Squibb has advanced approximately 25% from its 52-week low hit on Aug. 9, 2011. Based on a confluence of factors consisting of fundamentals, aggregate volume, block activity, and technical data, I believe Bristol-Myers Squibb is correctly positioned for a slight pullback -- but not a reversal in the trend. It requires many more and much bigger trades in this issue for that to happen -- i.e., more force.

This trade is very similar to the trade in Altria Group (NYSE:MO) that I wrote about recently.

Click to enlarge image.Click to enlarge

On the basis of the foregoing, these are my views and observations:

The Trade

I recommend establishing a short position in Bristol-Myers Squibb. Open your position with only one-fourth of whatever capital you intend to commit to Bristol-Myers Squibb at $34.75. Purchase the remaining three-fourths of the position at $37.53 and stop out at $39.00. Although I use $39.00 as the stop out, I would most likely put the stop out in at $39.09 because there will be others positioned with posted stop outs at that level and I would not want to be swept away with the tide, in a manner of speaking.

Do not post your stop out. I have said it before, but it is so important that 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 down or up again. In addition, when a stop out is triggered, it converts into a market order and that could be disastrous if the Designated Market Maker decides to really take advantage. Remember the "Flash Crash"?

I would be looking to exit the trade at a downside price target of $32.62. Do not allow this position to exceed 5% of your overall portfolio. I would seriously consider establishing a long position at or near $32.25 and apply the same rules for position sizing. You could also sell some near close-to-expiration puts in the hopes of having the stock put to you. If it is put to you, then the premium will bring the cost basis down. If not, then the premium is money in your pocket.

There is always the possibility that the trade may not work out.

Never a Sure Thing (Particularly in 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. 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 0.003 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: I have no positions in any stocks mentioned, but may initiate a short position in BMY over the next 72 hours.