In ZYX Change Method, every trade must pass through six screens. In the first Change Screen, we are looking for macro changes. In this case, our long time readers know that we have been negative on medical devices industry because we anticipate going forward macro environment will not be conducive to maintaining present margins. The only exception has been $BSX (Boston Scientific) as we have anticipated improving margins.
The second screen is Fund Flow Analysis Screen. Here we are using proprietary indicators to dissect money flow. We have been seeing negative Fund Flow Indicators on $MDT (Medtronic) and $STJ (St. Jude Medical).
The next screen is Theory ZYX Change Analysis Screen where we challenge our thesis and either support or disprove it. In this case, the screen has been positive for $BSX, negative for $MDT, and neutral for $STJ.
The next screen is traditional Quantitative Analysis Screen. In this case, the screen has been positive for $BSX, and negative for $MDT and $STJ.
The next screen is the Trigger Event Screen. The trade was triggered when $BSX announced it has stopped shipment and is retrieving inventory of it’s implantable cardioverter defibrillators and cardiac resynchronization therapy defibrillators. Fortunately for us, we could use our intimate familiarity with the defibrillators in question and dated but still useful experience of consulting in the manufacturing process of cardiac devices with Guidant (BSX acquired this business from Guidant) to analyze the news.
$BSX is required to validate all changes and submit them to the FDA. In this case it was clear that $BSX correctly validated but did not submit the changes to the FDA. Although a serious infraction, we saw the impact as temporary. Thus $BSX trade was ready on the long side. Before the open several brokers had very negative comments on $BSX. Such comments were easily understood within the frame work of Theory ZYX Analysis as ‘high inductivity’ based on history of quality issues at Guidant.
The next screen is the traditional Technical Analysis Screen. The tick chart pattern around $6.31 provided us a great entry. The entry was validated by our positive proprietary money flow indicators and bullish buying in calls.
Lastly based on the Trade Management Methodology of the ZYX Method we scaled in a 20% position. This gives us the flexibility to accumulate more if the price goes lower.
Similar analysis applies to our short sales of $STJ (St. Jude Medical) and $MDT (Medtronic). Up move in $STJ was accentuated by the St. Jude Medical announcement of several updates of its Pressure Wire Platform at the American College of Cardiology meeting. $STJ also announced a new marketing agreement with Siemens. In our opinion, the enthusiasm over this announcement was over done and we saw it simply as routine.
In case of $MDT the price was pushed higher in part, by the news of an FDA panel recommending approval of Deep Brain Stimulation Therapy for patients with epilepsy. Again over enthusiasm existed in the stock price as the news was expected.
The net result in the over enthusiasm was an opportunity to short sell $STJ and $MDT at great prices. We will continue to scale in short positions if these two stocks go higher.
Interestingly for the day, ratio of block trades on up ticks to down ticks for $STJ was 0.31 and for $MDT 0.36. This information further supports our trades.