Whirlpool And Trading Ranges: A Cautionary Tale

Whirlpool was one of five stocks I highlighted as trading-range breaking in a post made a week ago. From mid-May to early this month, it hovered in a range of about $40.50 to about $44. Then, it began shooting upwards, peaking at $56.34 yesterday. Today, though, it dropped 9.92% in regular trading and a further 0.49% in after-hours trading. When evening trading ended, it was at $50.50. The fact that its narrowed its 2009 EPS guidance range to the upside, from $3.00-$4.00 to $3.50-$4.00, didn't help even though the consensus estimate is only $3.52. Its revenues were down, which is currently frowned on.

Whirlpool is no longer in the Low P/E Bin, now because its 12-month trailing earnings have dropped to $4.70 as a result of its 2Q '09 earnings coming in at $1.04, but it was a mainstay. It was also a stock that a chart-oriented person might have bought when the excitement was ramping up.

That 10+ percent drop, when after-hours trading is factored in, clearly shows the risk inherent in being swept up by the bandwagon effect. Playing the earnings game doesn't always work, as the GE reversal last Friday also showed.

There seems to be only one way to play the earnings game with ranges. Buy a stock with good fundamentals while it's still in its range (preferably near the bottom of the range), sit back, and wait. Even the earnings effect isn't very reliable: Sunoco Logistics Partners' 2Q EPS jumped, which led to a brief leap-up in yesterday's after-hours trading, but that gain was more than reversed as of market open this morning. It's still in its tight range - perhaps because its revenues plummeted along with its expenditures - even though its 2Q EPS and revenues both beat the Street by a significant margin.

Once again, the vagaries of the market trump even a sensible trader's rule.

There's a more serious risk in range trading: buying in at the bottom of a range only to see the stock sink below it. Recently, the only Bin stocks that have done so are some banks: United Bankshares, and CVB Financial until its latest Street-beating report reversed the range-busting downtrend. Ironically, CVB was a TARP bank while United refused its allotment.

As is often the case, the market surprises and confounds. If there's any meaning to United and CVB's recent troubles, it would be that Mr. Market is still pessimistic about TARP-related banks. Fundamentals have the last say, though, and each bank's are different.