Wal-Mart Stores (WMT) out-performed the market for stocks nicely on Friday, rallying on the day while SPY dropped significantly on news of a General Electric first Quarter earnings debacle. While SPY lost more than -2% on the week, WMT actually gained 0.7% in the same time frame, and crossed above its 52-week high on Thursday. With SPY in a clear downtrend and WMT in a clear up trend, it seems that, historically, a counterintuitive pairs trade is profitable.
Q: How has the long SPY — short WMT pairs trade performed in the past when WMT rallies and SPY declines by more than -1% on a Friday?
A: According to the 11 previous occurrences of this event, omitting repeat occurrences within 10 trading days, SPY/WMT has shown a somewhat bullish edge that peaks 10 trading days after the event. Thus, the projected date for the peak of the bullish edge relative to the current event date (Friday, April 11, 2008) is Friday, April 25, 2008.
A long SPY short WMT position rallies in 82% of the cases (9 of 11) by an average of 6.0% relative to the close on the event date. The average of the one decline is 2.1%.
This historically rooted edge is not telling us that the market is going to rally, just as it is not telling us that WMT is going to fall, even though to take advantage of this edge a trader would need to short WMT and buy the same dollar amount of SPY. The trader is basically betting that WMT is going to underperform the market over the next two weeks, and historically it has proven to be a profitable trade.
Note that the event in this query suggests that WMT out-performed on a Friday; however, it doesn't seem that this out performance lasts much longer, historically speaking.
If you would like to see more details of this historical edge, go to www.markethistory.com
Ryan Soudan owns put option contracts on SPY, an ETF designed to track movement in the SPX.
HYPERLINK "http://www.markethistory.com/staff/detail.html?s=rsoudan" Ryan Soudan is an analyst with MarketHistory.com.
