While cloud-based software company Salesforce (NYSE:CRM) has suffered an inauspicious start to the new year, its luck could change — and potentially soon. Essentially, CRM stock could be on the cusp of a pivot in sentiment, meaning that the equity is functionally undervalued. It’s here that we need to have a discussion about what we actually mean by that term.
At first glance, the concept of good value in a public security feels intuitive. However, on an empirical level, the statement of value often refers to a continuous signal (such as price) and comparing it to another continuous signal (such as earnings), and then making a discrete declaration of undervaluation.
Unfortunately, the process above is a logical misstep, a categorical error much like attempting to draw a straight line across a ripple.
As with a pebble skipping across the water, the subsequent ripples are always moving. So too are price points, market multiples and interest rates. In other words, the “value” of a security is not fixed — it depends on the regime, just like a ripple’s cadence depends on where and when it is observed.
Declaring an investment to be undervalued in isolation is akin to stating that a particular ripple is smaller than it should be. Without a reliable mechanism to measure what “should be” looks like, the statement lacks substantive coherence.
Value, then, is open-ended and contextual, not absolute. This makes categorization and quantification under standard methodologies exceptionally difficult, if not outright impossible. However, through a process called abstraction, we can effectively convert the messy noise of everyday price action into defined, discrete states — specifically into quasi-binary codes.
Initially, the loss of price magnitude would seem to render such a discrete-event analysis useless. Ironically, though, the compression of continuous-time signal processing frameworks into defined, discrete states creates quantifiable — and recurring — sentiment pathways.
On a weekly technical chart, an observer can notice that, at least at time of writing, CRM stock is “resting” on its 200-day moving average. It’s at this point that many, if not most traders will draw a line arbitrarily across multiple price intersections and call it “rising support” or similar term.
I’ve done it a million times myself so I’m not pointing any fingers. But really, what are we saying here?
Essentially, such phrases are semantic illusions. Support just happens to be a price where selling activity previously stopped — and nothing more. And because support and resistance lines are not absolute concepts but fluctuate relative to the regime at hand, they offer no probabilistic benefit.
In contrast, compressing price action into discrete events allow investors to deploy first-order modified Markov chains, or mathematical models that describes systems that move between different states. These different states — and the probabilities of such transitions — can be observed. But for a Markov chain to exist, the system must be expressible in discrete, finite states with trackable transitions. Share price and revenue, being continuous scalar values, fail that test.
However, sequences of defined events are very much bounded and quantifiable. Further, with enough patterns and recurrences, one can develop a more realistic probability matrix for effective risk modeling.
For CRM stock, the equity in the past two months printed in totality a “3-7” sequence: three up weeks, seven down weeks. It’s a relatively uncommon pattern, having occurred 43 times over the past ten years. What’s notable, though, is that in 65.12% of these occurrences, CRM stock has popped higher in the subsequent week, with a median return of 2.38%.
It’s possible, then, that by the end of this week, CRM could stabilize near $242 before sentiment either consolidates or expands. From here, the behavioral signal becomes less conclusive, though historical rebounds often gather momentum in week two or three.
At the same time, it’s fair to point out that CRM stock has a history of sharp bounces following long stretches of volatility. Therefore, this could be a legitimate reversal rather than mere sampling noise.
No approach can perfectly predict forward price behavior and the discrete-event methodology is not an exception. Should the positive pathway not materialize, the risk for investors is a potential loss of 4.36% by this Friday. If so, we could be looking at a downside price target of around $226.
Notably, the magnitude of the median loss is greater than the median positive return, likely due to the sequencing effect. Again, a 3-7 sequence implies that the bears still have control of the market.
Nevertheless, the discrete-event analysis quantifies that investors more often than not buy the dips in CRM stock. So, while you should always be cognizant of the risks, you should also be on the lookout for the potential pivot.
