🗞 Re: Your Next Trade Idea

WHILE YOU POUR THE JOE… ☕️
Cracks Fingers 

One of the main reasons the S&P 500 has sustained its all-time high status is the hopes for rate cuts to come before 2025 is over, and now it looks like the chances of rate cuts are deteriorating in real time. 📉 

Why? Bonds sold off as yields spiked on a stronger-than-expected jobs report.

Here’s the thing though:

• Most jobs ended up going to the government and part-time or seasonal roles

So the report was actually much worse than the headline figure (147K) would suggest. But that’s besides the point.

As always, the point is how we can profit as traders from this shift in data, which is our entire job as traders.

Speaking of turning a profit from data, let’s get on with today’s email 📧…

ZOOMING IN
Striking Gold

Remember our last post on coming up with the first stage of long/short idea generation? 💡 

We landed on a justification for looking further into the apparel industry, for reasons you can check back to this last newsletter.

With the compass now set on Apparel, it is time to dig further and spread our outlier stocks, primed to fit inside a long/short equity portfolio.

The first step to find these outliers is to, well, understand what the norm is.

Retail Apparel Universe Selection

This is the next step in the workflow of idea generation, quantifying the ways market feels about certain stocks inside the industry.

Those inside The Sovereign Trader Program know this, and they can tell you this is where our edge as traders come from (don’t just take my word, take Goldman Sachs’ track record for it). 💵 

We highlighted them for you, so it’s kind of cheating at this point, but let me tell you what I saw and why I picked them:

• On Holding ($ONON) stands out in a forward P/E ratio justified by above-average earnings per share growth, a theme that continues in the P/B and P/S ratios.

• Lululemon ($LULU) trades at a discount on a forward P/E basis, justified by the below-average EPS growth rates.

However, when we spread these two stocks out on a chart, it’s evident that we are a little late to the party:

So what now, do we give up? No sir, there are still plenty of other reasons for us to consider $ONON a buy here.

However, we can’t go in blindly without a hedge, so let’s keep working. 🔎 

Here is where Boot Barn ($BOOT) stood out to me as a potential turnaround play on the downside, here’s why:

• $BOOT has an above-average forward P/E multiple yet the stock is pushing out below average EPS growth.

• This lack of justification is also shown in the P/B and P/S multiples, so I think that this stock could be primed for a reality check.

And, when we spread these two out, the chart looks a whole lot better for a buy. 📈 

But before we get to this, I want to invite you over to our free 5-day email experience, where you will learn the reasons why I ended up using these strategies as my go-to after years of losing money elsewhere.

First Step: Correlations

The first thing we teach our program takers is to check for correlation regimes, which is the foundation of the entire strategy.

Looks like $ONON and $BOOT are at the higher end of the regime, sporting a 55-65% correlation metric. 👀 

Theoretically, this means that these stocks should somewhat move together most of the time, creating an opportunity when they deviate too far away from each other.

And that is the next step in our modeling, checking for this distance and its relationship:

Now there is some math behind this, as you can’t just chart $ONON - $BOOT and call it a day, you need to take the stationarity of volatility and correlations into account.

We run a python script in the background and come up with a hedge ratio of 0.60x to give us a Pvalue of < 0.05 to be statistically significant. ✅ 

But, significant of what?

This test asks the question of “How likely are these two stocks to come back together after they drift too far apart?”, and a Pvalue of < 0.05 says “Very likely, like 95% likely”.

So when you chart $ONON - 0.60 * $BOOT on a platform like Thinkorswim, you will see that same chart.

Now comes the easy part. ⬇️ 

Timing The Entry

Okay so let’s recap what we’ve done so far:

1. We broke down a bit of the macro to land in apparel

2. We now have a list of stocks that are outliers or contradictions in order to trade

3. The relationship in our stock picks justify entering into a long spread

Now it all comes down to the timing, and that is the true beauty of what we do here at InvestiBrew.

Using another set of statistics, we transform the spread we had above into a Z-Score time series, which can more accurately describe where deviations lie.

As you can see, we are now trading at a -2 deviation on this time series, and we do know there’s a 95% chance of the time series returning back to the mean.

So yes, we are okay with buying this spread in the coming days, and will probably let you know in our Twitter or WhatsApp group. ✅ 

Next Steps

The final justification here is to understand three key aspects after we land on the statistical timing:

1. Financial justification for the companies

2. Catalysts

3. Risk management

All of which is coming your way in the next newsletter series for long/short, so stay tuned.

P.S.

Want to go from macro data → trade idea like we do?

If seeing those 38% returns coming from our last couple of long/short ideas struck a chord in you.

Then you’re in the right place, because shifting from retail to pro-level trader is what we pride ourselves in within InvestiBrew, and we’d love to work with you.

Let’s find if we’re a match ✅ 

To your success,

G. 🫰 

GO AND MAKE IT HAPPEN
Popping Your Long/Short Cherry

You will find that over the past decade, the hedge funds that have outperformed the industry are all focused on a multi-strategy approach (global macro).

But get this…

They are always overweight on a long/short equity strategy, and as you saw today, the statistics behind it just make it trader heaven when you know what you’re doing.

Today’s book recommendation 📖 is not a book, but a video for you to get a bit more exposure into the industry and why this strategy rules.

To your success,

G. 🥃