🗞 Quant at Work

WHILE YOU POUR THE JOE… ☕️
Robo Taxi Flop

The most awaited event for Tesla shareholders just passed: the Robotaxi reveal, which was supposed to send the stock price up to Cathie Woods’ insane predictions this year.

But, it was far from what the market expected, and the stock actually flopped by nearly 10% right after.

It’s not like we posted about the potentially bearish price action we expected out of Tesla a couple of weeks ago, or did we?

That’s just another one of our calls, which we make live on our Twitter account (you should follow us). Of course, there’s more where that came from.

Even though we were short-term bearish on Tesla stock, I think it could rebound near the $215 price level, which is awfully close to today’s stock price.

Speaking of next moves, let’s get on with today’s email 📧…

COMPUTERIZED TRADING?
Quant Strategies

As humans, trading by ourselves, we kinda suck at the game. Computers don’t have many of the flaws that we inherently have, such as periods of focus and distraction, energy levels, and emotions.

Even if computers are better than us by not having to deal with these factors, they still need to improve at trading. You know why? It’s because they’re blind. 🖥️ 

Let me explain why in this new model we just recently built:

This chart represents the spread between the price of the $SPY ETF and its 150-day moving average.

Visually, you can deduce two things here:

1. Each time it deviates to a too-high or too-low area, it quickly returns to its mean value.

2. The downward deviations are sharper than the upper ones. This is why people say, “Markets go up the stairs and down the window.”

Keeping that in mind, here’s the same chart but converted into Z-score form, with a 1.25 upward deviation and a -2.0 downward deviation to show potential buy/sell signals: 👀 

Each gray-shaded area represents the “Signal” where the spread deviated beyond these parameter levels, where we ideally would have bought and sold the $SPY ETF.

We wondered how this would have performed in live market operations, and it’s not that bad actually:

Over the past 8 years, this strategy would have returned 64% 🔥 (without leverage) while posting a standard deviation of only 0.5% to make it extremely safe and consistent.

This safety and consistency would warrant considering option contracts to gain responsible leverage, which we are now considering implementing once the next buy/sell signal comes through the model.

As far as predictability, we used the famous R-Squared method, which came out at 15.2% today. This means that 15.2% of the $SPY price action can be explained by the spread between its price and its 150-day moving average.

While insignificant, it is still impressive to consider as a single factor strategy.

On top of this indicator, we also look at other things like the market and volume profile, order flow, equity risk premiums, and much more which we’ve posted about before here.

Needless to say, all these other markers point to a potential downside move in the $SPY coming soon, thank us later. 📉 

TRADE OF THE WEEK
Make Warehouses Cool Again

In case you didn’t know or forgot already, the port strikes along the West Coast are still going on, and some economists forecast that up to $4 to $5 billion worth of trade is being lost every day. 💰️ 

Now, most would start looking to shipping companies to short, or buy as they now have more pricing power in front of this supply chain emergency.

But, when you are brainwashed by Wall Street, you get used to thinking a few dominoes ahead of the game.

Here is the next domino I found in this scenario: warehouse networks and other supply logistics along the coast and into the MidWest region of the US.

This is where this stock comes into play:

Prologis

This is a warehouse and logistics real estate investment trust (REIT) that operates nationwide to provide a network of logistics and supply chain services.

Now, not getting enough inventory through the ports places a lot of pressure on alternative transportation names past the ports, giving Prologis a new bottleneck to take advantage of this quarter.

Being able to charge higher rates for each day items spend in their warehouses, and getting a faster turnover due to these bottlenecks, puts the company’s EPS in a new path upward. 📈 

The $PLD market and volume profile shows the stock is near one of the best entry points of the year, where volume has started to cut off and potentially create a rebound price action soon.

We first wrote about this stock on our Twitter when it was only $118.25 🎯 (right at the cutoff level), which immediately rebounded by nearly 1.5% a couple of days after we gave it out.

Based on this same profile, our immediate target is set at $128-$130 👀, and here’s why we are bullish for this week’s earnings besides a potential EPS beat and more bullish guidance from management:

Markets are willing to overpay for this stock, which is always a good sign ahead of earnings. Trading at a forward P/E ratio of 20.9x puts $PLD at a premium of 18.3% to the industry’s average 17.7x valuation.

More than that, it is in the top 5 stocks when it comes to expected EPS growth, with a current forecast for 10.7% today.

Knowing that the company might report a beat based on potential new pricing action from the ports issue, markets want to pay nearly 15.0x price-to-sales (P/S) above the industry’s 8.5x average.

All good signs, but there’s more:

Most of the company’s net square footage is focused on California, where the heart of the port strikes.

Without boring you with the financials, I’m just going to show you why we are willing to go the extra step and buy call options instead of buying the stock this time.

It’s simple, really:

1. We have a clearly defined catalyst, which is earnings this Wednesday.

2. The risk is relatively small since we are at an annual volume cutoff point now.

3. Markets are paying premiums for this stock ahead of its earnings announcement.

But, which call options do we go for?

The most open interest is for the October 18th $130 strike call options, expiring only 2 days after earnings and right at the upper end of the current volume curve.

We don’t need to make more sense of it; it’s a play we don’t want to miss. 🔥 

NOW GO AND MAKE IT HAPPEN
The New Wall Street

Every day, you have to observe the markets with a scientific mind, and follow a process to make that observation into a theory, then quantify that theory before you get too excited and go risking your money on some unproven thought.

This is exactly what we did on that $SPY strategy, and it’s something today’s book recommendation 📖 can teach you to do or at least show you the ins and outs of the new Wall Street.

To your success,

G. 🥃