On the surface, Norwegian Cruise Line (NYSE:NCLH) comes off as a highly speculative enterprise. Its price action represents the first obvious clue that not all is well. Since the beginning of this year, NCLH stock has suffered a more than 32% loss in equity value. Compounding matters, the economic outlook appears rather ominous, with consumers struggling amid stubbornly high prices and rising challenges in finding employment.
Sure, the cruise ship industry is known for its great deals relative to other forms of leisure and entertainment. Nevertheless, the present circumstances don’t exactly favor discretionary expenditures. At the same time, the obvious factor regarding whether NCLH stock rises or falls comes down to demand.
It’s here that many investors — even experts in the field — get tripped up. Price (or any other scalar signal) is not the equivalent of demand. Rather, price is merely the recording of demand at a specific point in time. Demand itself is a defined, discrete state of existence. In other words, it’s either happening or it’s not. Conceptually, there are no half-demand states.
What does this have to do with assessing NCLH stock? Fundamentally, in order to understand how the security responds and where it may end up, an investor must consider its demand profile rather than its price. Unfortunately, this process requires an overhaul or rethink regarding technical and even fundamental analysis.
Because both approaches depend on continuous scalar signals, it’s difficult to assign any meaning to their measurements beyond the context to which they were applied. For instance, NCLH stock at around $17 a pop bears no relationship to NCLH when it was priced at $60.
Again, these are scalar talking points — they’re not fundamentally meaningful nor comparable across sentiment regimes. What is meaningful and comparable, though, is demand.
It’s really simple. Demand converts fence-sitters into buyers. If there’s no demand, there’s rising supply — economic law and all that sweet jazz. The thing is, with demand being a binary state of existence, this canvas opens the door to Markovian principles, which is where the real fun stuff lies.
One of the main reasons that I picked NCLH stock as a topic of interest for this deep dive is that my screener — which aims to identify high-probability trades — immediately spotlighted it as a top prospect. However, the signal itself is hidden from the traditional methodologies of technical and fundamental analysis.
The reason this is so has to do with the nature of the numbers involved. As stated earlier, price is a continuous scalar signal. It has no boundaries, no definition. There is no such thing as a “good price” or a “bad price” — the price is just the price, a way of measuring or recording value.
In this sense, price can’t be counted into good states or bad states or any other categorization. But demand can because it’s either happening or it’s not. As a binary code, sequences of demand can be counted and categorized — and if they recur enough, they may be used for empirically calculating probabilities.
During the last 10 weeks, NCLH stock posted a “3-7” sequence: three weeks of upside interspersed with seven weeks of downside, with a negative trajectory across the period. The 3-7 sequence is quite rare, materializing only 31 times over the trailing decade. Enticingly, in nearly 68% of cases, NCLH rises in the subsequent week (which coincides with the current week).
Adding to the excitement, the risk-reward profile asymmetrically favors the bullish speculator. Using historical data projected outward, the median return for this week is forecasted to be in total 4.98%, whereas the median loss sits at 2.61%. Granted, this asymmetry doesn’t eliminate risk altogether.
However, when it comes to speculating on a discounted security, this is about as smart of a strategy as you’ll find.
Over the next 10 weeks, NCLH stock could become a grind-it-out type of investment. Should it break the $18 plane, progress may become quite choppy, ultimately settling at a price of around $18.37. On the other hand, if the negative pathway wins out, investors may expect heavy turbulence, with shares projected to broaden out in the low $17 range.
For those interested in betting on NCLH stock, there are two approaches to consider. First, the most straightforward is to buy its security in the open market. There’s a solid chance that a sentiment reversal is playing out. If so, you can gradually ride the wave higher.
For a more tactical approach, you may consider the 17.50/18.00 bull call spread for the options chain expiring May 9 (next Friday). This transaction involves buying the $17.50 call and simultaneously selling the $18 call, for a net debit paid (at time of writing) of $26. Should NCLH stock rise through the short strike price of $18, the maximum reward is $24, or a payout of over 92%.
