Employment services firm Paychex, Inc. (PAYX) is a leading payroll processing, human resources and benefits outsources provider for companies of all sizes. Given the strong economy, this stock has benefited significantly, but it has now become an "inflating parabolic bubble."
Paychex stock closed Wednesday, April 17, at $81.56, up 25.2% year to date and in bull market territory at 33% above its Dec. 26 low of $61.32. The stock set its all-time intraday high of $62.64 on April 16. The stock is not cheap, as its P/E ratio is an elevated 28.92 with a dividend yield of 2.75%, according to Macrotrends.
The daily chart for Paychex
Paychex stock began its bull run on Dec. 26, when it traded as low as $61.32. This day was a "key reversal," as its close of $64.32 was above the Dec. 24 high of $63.70. A "key reversal" indicates that a tradeable rally will follow.
The close of $65.15 on Dec. 31 was an important input to my proprietary analytics, and still in play are an annual pivot at $72.44 and a semiannual pivot at $74.68. The close of $79.05 on March 29 was another important input to my analytics and resulted in quarterly and monthly value levels at $77.37 and $76.87, respectively. Next week's risky level will be $83.04.
The weekly chart for Paychex
The weekly chart for Paychex is positive but overbought, with the stock above its five-week modified moving average of $78.96 and above its 200-week simple moving average, or "reversion to the mean," of $60.73. The 12 x 3 x 3 weekly slow stochastic reading ended the week at 95.23, well above the overbought threshold of 80.00 and above 90.00 as an "inflating parabolic bubble."
Trading strategy: Buy Paychex shares on weakness to the quarterly and monthly value levels at $77.37 and $76.87, respectively, and reduce holdings on strength to its weekly risky level at $83.04.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February and March. The quarterly level was changed at the end of March.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.