Kroger Versus S&P Spread
Friday, June 15, 2012 at 8:04AMSome of my favorite scans we provide to our SpreadTraderPro members are statistical runs on ETFs vs stocks. On May 2, Kroger caught my attention as it was cheap statistically versus $SPY. The spread SPY-KR was trading near the high of the range, with a zscore of +1.6:
The momentum though was clearly favoring $KR to weaken further against the major index so I decided to wait to sell the spread. I set an alert at a level of +$5 using the "My Alerts" tab. On June 13, the alert triggered when the spread traded above 5 and I sold a small quantity at $5.04.
On June 14, the company increased its earning forecast for fiscal year 2012. The spread dropped to -2 on the news and then rebounded to $1 and I sold more at that level.
This is a spread I will sell more of at any opportunity as it moves back toward its average with the current catalyst.
The trick here is to combine value and a catalyst that will propel the spread to a more normal level. The catalyst is critical to put an end to the momentum that pushed the spread in the overvalued category in the first place.
Where do you see pockets of value on a relative basis? Have you thought about running a statistical test on your stocks versus major indices using our Spread Analyzer?
Written by Michael Bigger. Follow me on Twitter and StockTwits.
Reader Comments (8)
Great article Michael! Gets me thinking about how to use this with some of my long or short stock positions to take out some of the risk. One question, how did you decide that the $5 level was where you wanted to sell the pair, why not $4 or $10?
Good stuff. It was at the top of the chart and I thought if it goes there it will be on a spike and I want to sell very small (monitoring position) and follow it for awhile. When I got the news is all it took to push me to go Bigger as in Michael Bigger. ;-)
I like the Bigger thing! :-) So, in other words your saying that on your gut / experience "feel", you decided that that would be a good spresd to start scaling into the position as opposed to seeing it start down and then selling it?
No. I need a position in order to monitor correctly. A small position achieved this monitoring objective. Just my style.
Let's see if I can understand this. You take a small position so that you get it on your weather screen and then you will trade it in a discretionary manner after the feel period? Or, do you then have a mechanical way to trade it after getting the feel?
KR is cheap statistically versus the SPY. I like that but I can't take a big position because of the momentum. So I take a small position so that I focus on it. If I hadn't taken a position I would have missed the beat most likely. You have a better focus when you have skin in the game.
I agree that you need to have a position in order to put it on your radar (or weather map). Did you look at trying to find a pair in the same/related industry to avoid that risk and if not why not?
I looked but I could not find anything else of interest that made sense.