Some 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.