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(kai zhang/Getty Images/iStockphoto)
(kai zhang/Getty Images/iStockphoto)

Schizas’ Mailbag

CYS Investments needs to overcome resistance at $9 Add to ...

Hey Lou,

If you have time could you examine CYS and ARO? I have some CYS and it pays a decent dividend. I’m not sure if this is a good time to add more.



Hey Nate,

Thanks for the assignment.

I will investigate the case for CYS Investments Inc. today and review the situation at Aeropostale Inc. in my next post. CYS is a specialty finance company that takes on debt to invest in residential mortgage backed securities. The securities are issued by government sponsored enterprises such as Fannie Mae and Freddie Mac which guarantee repayment of principal and interest.

CYS pays a dividend that yields 14.63 per cent which you identified as decent and I would describe as spectacular. The only caveat would be to watch for cuts in the distribution which happened last year leading to a substantial drop in the stock price.

A probe of the charts will help identify if now would be a good time to add to your position.

The three-year chart illustrates the selling pressure that gripped the shares from late May of 2013 when they breached support at $9.50. The MACD and the RSI generated sell signals in April following the death cross that surfaced in March. These three patterns in concert led to a substantial loss in capital for investors who failed to acknowledge that it was time to hit the silk.

The momentum indicators generated buy signals in December of 2013 as the shares caught a lift to $9.00 where they met resistance in May of 2014. The next event for the stock will be the release of second-quarter results scheduled for July 21, 2014.

The six-month chart depicts the resistance at $9.00 and the neutral posture of the MACD and the RSI. There is a golden cross that formed in late February and an intact uptrend line. The stock has retested support along the 50-day moving average since March and found investors willing to buy on a pullback.

If CYS can break through $9.00 with conviction it can run to $9.50 with few obstacles in its way. Given that you already have a position in the stock you need to take another look what drew you to the opportunity and if there have been substantial changes in the parameters that got you to buy. It would also be prudent to watch how the shares trade ahead of the release of second-quarter results and see if the MACD and the RSI can provide more clarity as to direction.

Make it a profitable day and happy capitalism!

Have your own question for Lou? Send it in to lou@happycapitalism.com.

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Follow on Twitter: @louschizas

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