Dave Allen

About the Author Dave Allen

Dave is the VP of Sales and Marketing of EidoSearch. He has over 14 years of proven success working in the Financial Services vertical. Mr. Allen was most recently GM for Americas at TIM Group, the world's leading Alpha Capture network, where he ran sales and service functions for the region and was a member of the company's steering committee responsible for strategic initiatives. He came to TIM Group via their acquisition of First Coverage, a financial technology startup, where he was VP Sales and Marketing and responsible for sales, marketing and business development efforts with brokerage firms, asset managers and hedge funds. Prior to that he has an impressive track record in sales management, channel development and as a sales contributor in roles with CCBN StreetEvents, Thomson Financial and Decision Resources.

Good Entry Point for Wal-Mart Stores, Inc. (WMT)?

“Every Exit is an Entry somewhere else” – Tom Stoppard

Wal-Mart Stores, Inc. (NYSE:WMT)’s stock price has taken a beating over the past few months. After hitting an all-time high of $90.47 on January 8th, the stock is now down -14% as of Friday’s close while the market is up a little bit over the same time. Is this typically a good time to buy or a good time to get out?

At EidoSearch, we analyze patterns in data through our patented “Data-Based Intelligence” technology. We simply match patterns from the vast amount of Big Financial Data historically (a billion a day actually), to find like examples from history and to capture the markets response across all different possible market conditions. This allows us to provide a range of return probabilities that we’ve back-tested exhaustively.

The majority of investment decisions are based on fundamentals. The majority of our clients are fundamentally oriented, and where our statistics typically add a lot of value is at decision points. If a PM likes the fundamentals behind Wal-Mart, has a position, and is wondering if this is a good time to build the position further on the dip, we provide a gauge to strengthen the profitability around that “timing” decision.

So, without getting into the fundamentals on why Wal-Mart has been getting crushed or why it may or may not be poised for a rebound, we’ll let the statistics do the talking. Whether or not you believe in data analysis, pattern analysis or statistics and probabilities, the scenarios below are pretty compelling.

Scenario #1: Looking at the current 3 month price trend in Wal-Mart’s trading history

Here’s a chart of the 1 month forward returns for the 52 mathematically similar instances of the current 3 month price trend we found in WMT’s trading history. There is only one example, from May of 1973, where the stock runs down more than -7% in the next month. There are 20 historical examples of the next 1 month’s return that are up 7% or more. The stock is up 75% of the time in the next month.

WMT

The projection below shows the average return of all 52 examples in Wal-Mart’s history. The stock is up an average of 7.1% in the next 1 month. You can also see a much different skew in EidoSearch’s projected return distributions than what the market is pricing in via Options (implied vol overlay in orange below).

WMT2

Scenario #2: Looking at Wal-Mart’s current 3 month price trend in Lg Cap Department Stores historically

In addition to looking just at Wal-Mart’s history for comps, we also looked at peer companies to provide additional analysis on the range of returns after this time of pattern historically.

Here’s a chart of the 1 month forward returns of each of the 64 mathematically similar instances of WMT in the peer group historically. The three negative tail instances are from Sears and J.C. Penney (twice) from 2007. The stock is up 62.5% of the time in the next month in this analysis.

WMT3

The average return looking at the peer group for similar instances from history is a 3.2% in the next one month. You can also see where the EidoSearch forecasted return distributions are similar to the markets expectations for volatility to the downside (implied vol overlay in orange). However, based on the actual return distributions of this pattern historically, there is much greater projected upside than the market is pricing.

WMT4

Scenario #3: Looking at a longer 6 month price trend in Wal-Mart’s history

By looking at a 6 month pattern, you’re able to capture the stock’s strong run-up in Q4 as well as the current big drop. We found 11 similar instances in Wal-Mart’s history, and only one time is the stock down in the next 3 months (Spring of 2000 Market bubble).

WMT5

Average return of the 11 similar matches in Wal-Mart’s history is 11.1% in the next 3 months. You can also see in the chart below how the market is currently under appreciating the upside range in volatility (implied vol overlay in orange in the chart below).

WMT6

 

Have a great week!

  • nobodyinparticular

    I’d be interested in seeing how similar the “similar” situations in the set you’re comparing the current one are on a fundamental front. In other words, the criterion you used to determine how “similar” the past situations were, was just the amount it dropped in a certain period of time, right? I think there is merit in examining each case to see how similar their underlying concurrent REASONS for going down at the time were. Namely, the one at the crash of 2000, that was amid a broad market crash, so that one really isn’t a similar situation. How many of the others were big drops surrounding all sorts of doom and gloom hoopla for walmart. I mean look at the recent news releases. You’ve got those idiots at zacks rating it a strong sell, and at the same time all sorts of analysts lowering their forecasts, all these people saying the company’s growth is dead and that they will diminish in market share. How many of the “similar” situations in your data set saw walmart stock go down amid similar reasons, and what does the probability distribution of its change in share price over the next month and next 3 months look for just those that were REALLY similar then? I’m not saying that your reasons to expect it to go back up are wrong, it could very well turn out that it’s even MORE positive if you did it that way. But one thing I have learned in my many failings is that you absolutely must not do technical analysis in a vacuum. Statistical evaluations require data which has enough data samples to be statistically significant. And the less similar the situations in your set are, for any reason, to the current one, the less statistically significant your results are, because the equivalent true number of samples in your sample set is less than you really think it is, as each one actually counts as less than 1. I sure hope you’re right, mind you, I am SOL if walmart doesn’t turn around, I am in too deep and too far to turn out now. It started with a sensible sized bet and it just KEPT FRIGGING GOING DOWN! I just know it’ll go just a LITTLE bit farther than I can maintain my position and then it’ll be right back up to 90, the next week. Such is the predictability of my failings. Whether I can’t roll over my options any more, or just take the massive loss, it’ll be immediate and profound, its rise back up, just you see. But maybe I’m too much a pessimist. It would be nice to win once. Still, I’d like to know the result of a test with different criteria for determining how similar past situations are to the current one. Maybe you’ll allow more data samples into the set where it didn’t drop as much, but dropped for the same reasons, for instance.

    You know what I think? I think it’s the combination of the 3 following reasons – 1. The walton family has sold off some of their shares. It was bound to happen I guess. I wish they didn’t sell it sell it so fast and so obtusely and indifferently to how fast the market could absorb the shares. And right when I sold puts. 2. Panic panic panic. Ignorant people trading. “It went down, therefore it will keep going down, oh my god, have to sell now, walmart is having a going out of business sale on its stock, it’ll be gone in 2 months! Oh my god, they are paying their employees 9 dollars an hour now! They can’t afford that! That’s almost a difference of 5 cents per share per quarter! That eliminates their entire profit!” And don’t think the dumb analysts are any better. They can’t find their own rear ends. 3. The market has finally realized that for the last 2 years, it’s following the same script every damn quarter. Walmart puts out its earnings report, it roughly meets or even exceeds concensus estimates (and since they’ve been lowering them without just cause, they’ll DEFINITELY drastically exceed them this next time), but they release a gloooooooomy outlook, and it goes down 5 dollars a share that day. But THEN, over the next 3 months, it goes back up, because people realize the outlook is nonsense. Well NOW, the market is expecting this, and it’s already priced in for the next one. EXCEPT that this descent was starting from already being down last time. So NOW when they release their gloooooomy outlook with their next earnings report (IF they actually do that this time) it’ll have to actually go UP in response, because it was already priced in 200% as much as it should have been.