The Saturday Spread: Statistical Signals Flash Green for CMG, TMUS and VALE
Here's a question you may have wondered about: if meteorologists frequently provide five-day weather forecasts, how come market analysts (within reason) don't do the same for the equities sector? Granted, human behavior can be irrational at times and black swan events by nature are unpredictable. However, on the whole, humans generally think in predictable manners.
At first glance, the problem should be easy to address. When forecasting weather, meteorologists utilize ensemble models, historical simulations and probability distributions. By converting the applications toward the equities space, market analysts can assess the three main factors that meteorologists use for the weather:
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The Saturday Spread: Statistical Signals Flash Green for CMG, TMUS and VALE
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Define what event they're modeling for
Determine when said event might occur.
Calculate how likely the event will materialize based on past analogs.
Unfortunately, both fundamental and technical analysis runs into a major structural wall when addressing past analogs. In both cases, the measurement metric is non-stationary; that is, the metric changes (often wildly) across time and context. For example, the share price for a hot growth stock may be vastly different from what it was ten years ago and the same can be said about its valuation ratio.
With such discrepancies, past analogs are effectively impossible to calculate — unless you impose stationarity on the target dataset.
This is the core reason why I've been focused on market breadth, which are sequences of accumulative and distributive sessions. Market breadth is a representation of demand and demand is a binary construct — it's either happening or it's not. As such, it's easily categorizable and quantifiable, thus facilitating probabilistic analysis.
Just as importantly, market breadth sequences are falsifiable. Anyone can peer review my work and arrive at the same conclusions. The same cannot be said for certain methodologies, such as interpretive chart patterns in technical analysis.
Because of the falsifiability of demand profiles, I'm able to filter out statistically intriguing ideas among hundreds of stocks. Below are three names to watch closely this week.
With the closing bell on Friday, Chipotle Mexican Grill (CMG) ended the session up nearly 2%. For the week, the security gained just under 5%, potentially reflecting a sentiment shift. It would be a welcome change of pace. Since the beginning of the year, CMG stock has dropped 12.47%.
However, the most intriguing development in my opinion is CMG's quantitative signal. In the past two months, the security printed a 4-6-U sequence: four up weeks, six down weeks, with a net positive trajectory across the 10-week period. This is a rare pattern, materializing only 27 times over the trailing decade. And in 66.67% of cases, the following week's price action results in upside, with a median return of 3.05%.
Two circumstances shine a bright light on the above setup. First, CMG stock seems to respond well to positive momentum. While the balance of distributive sessions was greater in the past 10 weeks, the overall trajectory was still northward — and that generally tends to be a bullish sign.
Second, as a baseline, the chance that CMG stock will be profitable over any given week is 51.47%. Therefore, long-side speculators are incentivized to consider a debit-based strategy.
Aggressive traders may consider the 53/55 bull call spread expiring July 11. Using data from Barchart Premier, the call spread screener effectively identifies the 53/55 spread as arguably the most compelling idea from a risk-reward standpoint. Traders can lower the probabilistic risk to the 51/54 spread; however, doing so dramatically lowers the payout.
Right now, T-Mobile US (TMUS) stands at an awkward juncture. TMUS stock started the year auspiciously, at one point gaining about 24% on a year-to-date basis. Since early March, however, the security hasn't looked appetizing, losing roughly 19% of equity value. Still, a quantitative signal suggests that a reversal may be in order.
In the past two months, TMUS stock printed a 4-6-D sequence: four up weeks, six down weeks, with a net negative trajectory across the 10-week period. At first glance, the balance of distributive sessions outnumbering accumulative may not seem like a good sign. Nevertheless, in 62% of cases, the following week's price action results in upside, with a median return of 2.48%.
On Friday, TMUS stock closed at $221.52. If the implications of the aforementioned sequence pan out as projected, the equity could reach over $227 quite quickly. Should the bulls maintain control of the market, they could drive the price above the $230 level over the next few weeks based on past empirical analogs.
Those interested in taking a shot may consider the 220/230 bull call spread expiring July 18. This trade gives you about four weeks for the above thesis to pan out. If TMUS stock rises through the short strike price ($230) at expiration, the maximum payout for this trade clocks in at over 105%.
As a metals and mining company, Vale (VALE) commands significant relevance. At the same time, global economic uncertainty — exacerbated by ideological paradigm shifts and now a geopolitical crisis — fundamentally clouds the narrative. On the technical front, VALE stock has gained just over 2% YTD, with the security struggling for traction since early April.
Still, those who understand the ebb and flow of the financial markets may be enticed with the mining enterprise. Quantitatively, in the past two months, VALE stock has printed a 3-7-D sequence: three up weeks, seven down weeks, with a negative trajectory across the period. Ordinarily, the balance of distributive sessions grossly outweighing accumulative is a cause for concern. For VALE, it's an invitation to put it on one's radar.
In 60.47% of cases when the 3-7-D sequence flashes, the following week's price action results in upside, with a median return of 2.79%. What makes this setup all the more enticing is that, as a baseline, the chance that a long position in VALE stock will rise over any given week is only 49.91%. Statistically, VALE suffers from a slight negative bias.
However, the aforementioned sequence tilts the odds in favor of the bullish speculator. Further, should the bulls maintain control, VALE could move toward the $9.50 level over the next few weeks.
With the market intelligence above, traders may consider the 9.00/9.50 bull call spread expiring July 11. While there are certainly call spreads with far bigger payouts, the 9.00/9.50 is arguably the most realistic transaction.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
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