The Saturday Spread: These 3 Stocks Statistically May Be Cooking Up Something Special (GILD, WMB, XPEV)

One of the common presuppositional fallacies in the financial analysis industry is that the market has somehow incorrectly priced a particular security or commodity. Eventually, the argument goes, the market will recognize the correct price. Until then, there is an opportunity for investors to position themselves ahead of the move.

However, as well-meaning as the argument may be, the line of thinking runs into a major dilemma; essentially, extraordinary claims require extraordinary evidence.

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To be fair, all arguments about the future carry a presupposition. However, what separates a reasonable forecast and a presuppositional fallacy is the nature of the assumptions. In the former situation, the assumptions are explicit, bounded and testable. Essentially, the “if” conditions are listed on the table. In contrast, the latter situation involves the assumptions smuggled in as givens.

To promote sound reasoning and logic, I have exclusively pivoted toward discrete-event analysis. Rather than analyze price action in its native form as continuous scalar signals, I convert the data into behavioral states. This process facilitates epistemological continuity: both the input and output reside in the same domain. That’s different from traditional methodologies of fundamental and technical analysis, which involve studying scalar signals but assigning them discrete labels, such as “good price” or “undervalued.”

But it’s not just consistency that’s at stake here. With discrete, bounded objects as datapoints, the patterns and signals generated are falsifiable. That’s huge when it comes to any semblance of scientific integrity. And while mathematical rigor doesn’t guarantee a successful outcome, it can potentially provide a more effective framework for trading decisions.

With that said, below are three compelling stocks to consider.

Gilead Sciences (GILD)

Let’s just get right into the signal that I’m seeing in the equities arena for Gilead Sciences (GILD). In the past 10 weeks, the market voted to buy GILD stock four times and sell six times. During this period, GILD enjoyed an upward trajectory. For brevity, we can label this sequence as 4-6-U.

Story ContinuesIt’s an odd sequence because the balance of distributive sessions outweighs accumulative, yet the security itself moved higher. What’s interesting, though, is that this rare sequence historically signals a continuation of bullishness. In 69.23% of cases, the following week’s price action results in upside, with a median return of 3.41%.

As a baseline, the chance that a long position in GILD stock will rise on any given week is 53.18%, which is a solid upward bias. Still, the flashing of the 4-6-U provides a statistical edge for bullish speculators. If the bulls manage to maintain control for a second week, the expected median performance is an additional 2.22%.

What should be noted, though, is that a one-tailed binomial test on the sequence reveals a p-value of 0.1898. This indicates that there’s an 18.98% chance that the implications of the 4-6-U could materialize randomly as opposed to intentionally. It’s not the strongest signal but it’s decent relative to the stock market’s open and entropic nature.

Using data provided by Barchart Premier, we can see that the 120/125 bull call spread expiring Sep. 19 appeared to be favorably mispriced. Based on past analogs, GILD stock could potentially exceed $125 within two or three weeks.

Williams Companies (WMB)

Again, we’ll just dive right into Williams Companies (WMB). In the past 10 weeks, the market voted to buy WMB stock four times and sell six times. During this period, WMB incurred a downward trajectory. Using the naming logic mentioned earlier, we’ll call this sequence 4-6-D.

In a behavioral sense, the 4-6-D is boilerplate: the balance of distributive sessions outweighs accumulative and the security has trended in the negative direction. Still, historically speaking, this pattern tends to be a reversal signal. In 61.54% of cases, the following week’s price action results in upside, with a median return of 1.91%.

As a baseline, the chance that a long position in WMB stock will rise on any given week is 53.47%. Therefore, the 4-6-D provides a statistical edge over the standard expected probabilistic performance. If the bulls maintain control for a second week, speculators could see an additional performance boost of 0.84%.

It’s worth pointing out that the p-value for the above sequence is 0.1981, which is elevated. There’s a chance that some of the good vibes could stem from randomness rather than intentionality.

Those who want to take an ultra-aggressive bet may consider the 58/59 bull call spread expiring Aug. 29. I’m not really seeing a push materially beyond $59; hence, my hesitancy in considering call spreads with a second leg of $60 or greater.

Xpeng (XPEV)

Finally, I’m really intrigued by Xpeng (XPEV), which will release its second-quarter earnings report on Tuesday before the opening bell. Key financial disclosures are always unpredictable so traders should keep that in mind before betting on XPEV stock. With that said, here are the details.

In the past 10 weeks, the market voted to buy XPEV stock four times and sell six times. With a downward trajectory, XPEV has printed a 4-6-D sequence, just like Williams Companies. And similar to WMB, this pattern typically indicates a reversal signal.

In 60% of cases when the 4-6-D flashes, the following week’s price action results in upside, with a median return of 6.44%. That’s why I’m so interested in XPEV stock. Potentially, in one shot, the security could pop to just under $21. If the bulls maintain control for a second week, traders may see an additional half-a-percent performance boost.

What’s really intriguing is that the sequence features a p-value of 0.0609. This almost meets the 5% threshold of statistical significance. So yes, I’m watching the Q2 earnings very closely.

Right now, XPEV stock could be played aggressively in a number of ways. However, I must say that the 20/21 bull call spread expiring Sep. 19 — with its 138% payout — is awfully tempting.

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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