We’re right in the heart of earnings season and CenterPoint Energy (NYSE:CNP) is on deck, set to disclose its results before the opening bell on Thursday. As a utility company based in Houston, Texas, CenterPoint plays a pivotal role in the surrounding regional economy, providing electric and natural gas utility services to customers across Indiana, Ohio, Louisiana, Minnesota, Mississippi and Texas.
As an essential business, CenterPoint offers a relative haven for those looking to steadily grow their money during these confusing times. Since the start of the year, CNP stock gained over 17% of equity value. For context, the benchmark S&P 500 is down just over 10% during the same frame.
Still, while the immediate momentum appears robust, the forward outlook is a bit hazy. Therefore, CNP stock is arguably a trade rather than an investment. Here’s how to best approach this name.
A classic mistake that undergirds market analysis is the prediction of price from price rather than the proper approach — the prediction of price from patterns. Quite often, you’ll hear statements such as, “this stock appears overbought” or “the stock should bounce off support.” However, such claims are linear extrapolations of perceived significance.
Because price is a continuum — there being no such thing as a good or bad price — there’s no way to effectively measure a security’s transitional markers, or the catalysts to inspire one state or cycle to another cycle. Instead, price just morphs into whatever scalar reality it finds itself in, much like water becomes the shape of its container.
To get around this problem, I compressed all price discovery into a “genetic code” comprising of 33 strings. In this manner, price is defined, discrete and quantifiable. And as quantifiable and categorical metrics, they can be grouped in classes, thus providing empirically observable patterns — patterns that recur and potentially offer predictive value.
As a baseline, the chances that a long position held for a one-week period will rise is 53.5% — a slight edge for the bulls but nothing to write home about. However, it would be a mistake to assume that in all sentiment states, the chances of one-week upside are always 53.5%. In certain cycles, the probabilities gyrate above and below this baseline.
Currently, over the past two months, CNP stock in totality is in an 8-2 sequence: eight weeks of upside, two weeks of downside. During this cycle, the bulls have a nearly 65% chance of enjoying upside in the following week, with a median return of 1.1%.
Sounds great, right?
The thing is, because of the momentum, next week will likely see CNP hit a 9-1 sequence with an upward slant. In such cases, the odds of success are only 50/50 — worse than the baseline.
Adding to concerns of overexposure, CNP stock has already gained over 25% in the past six months. That’s quite rich for a utility company. Frankly, the safe-haven play could be overextended — and the empirical probabilities appear to make that case loud and clear.
If you’re a professional trader, there’s a chance to extract quick profits. However, you may need to be super-quick on the trigger, both in the act and selling.
