One of the most active stocks last week was SEI Investments (NASDAQ:SEIC). Billed as a financial services company, SEI is a global provider of investment processing, management and operations solutions. Trading volume recently hit 8.787 million, a far cry from its three-month average volume of only 971,447 shares.
Fundamentally, we could get into a discussion on the improving prospects for the broader financial ecosystem. While the economy remains troubled due to elevated costs and uncertainties surrounding trade policy, the Trump administration has signaled a willingness to negotiate.
In fact, there’s an acronym that’s becoming rather popular to describe the president called TACO: Trump always chickens out. It’s crude but the point is that the rhetoric is more bark than bite.
As such, Wall Street is effectively digesting the political turmoil rather optimistically and, in theory, that should be beneficial for SEIC stock. Still, that’s not the main driver for why bullish traders should consider SEI. Instead, it comes down to market breadth and the probabilities that this datapoint signals.
Under the traditional approach of the financial publication industry, an analyst will consider either the financial performance of the target enterprise or the underlying security’s price discovery dynamics. By various computations and assessments, the analyst will determine whether a specific opportunity is undervalued or mispriced.
However, the critical problem with fundamental and technical analysis is the lack of first-order principles. For example, you’ll often hear the concept that a price-to-earnings ratio of around 15 times trailing earnings represents “fair value.” But what is the justification for such a statement?
Similarly, on the technical front, you may encounter assertions such as a Relative Strength Indicator (RSI) reading of 20 represents an oversold condition. But again, what is the justification for this declaration?
The technical approach becomes even more problematic because of the lack of falsifiability. How does one go about determining a “real” head-and-shoulders pattern from a “fake” one? Also, why would price action abide by Fibonacci retracement levels? A lot of what you find in financial publications are merely historical cherry-picking, not first-order truths.
What does matter is demand, primarily because it’s a binary concept: there’s demand (which is accumulation) or there’s no demand (distribution). While price itself is a poor metric for long-scale comparisons because it always fluctuates, sequences of demand — or market breadth — represent discrete states.
This is an important distinction because 10 years ago, SEIC stock was trading for roughly half the price it is today. That’s too much of a leap for sensible statistical analyses, especially because a stock’s float can also change dramatically. But market breath sequences? That’s an analysis on demand structures, which can be categorized and quantified across time periods.
And anything that can be categorized and quantified is also projectable from a probabilistic standpoint.
Subsequently, from a market breadth perspective, SEIC stock printed a 7-3-U sequence: seven up weeks, three down weeks, with a net positive trajectory across the 10-week period. Notably, in 65% of cases, the following week’s price actions results in upside, with a median return of 1.35%.
On Friday, SEIC stock closed at $85.26. Should the implications of the above pattern pan out as projected, the security could hit $86.41 within a week or two. If the bulls maintain control of the market, the price could drive toward the $87 to $90 over the next several weeks.
Primarily, the above setup is tempting because, as a baseline, the chance that a long position in SEIC stock will be profitable over any given week is only 53.59%. In other words, the current sentiment regime adds 11.41% of “free odds” to the bullish speculator, thereby incentivizing a debit-based long-side strategy.
To be clear, we’re talking about positively shifting probabilities, not certainties. A success ratio of 65% still leaves open a 35% failure rate. Further, this ratio only applies to the coming week’s price action, not necessarily for future weeks.
Still, the 7-3-U sequence may be signaling a behavioral transition in SEIC stock. For those who want to take a shot, the 85/90 bull call spread expiring July 18 may be attractive. This transaction involves buying the $85 call and simultaneously selling the $90 call, for a net debit paid of $330. Should SEIC rise through the short strike price, the maximum reward is $170, a payout of roughly 52%.
What makes this idea enticing is that most of the market is expecting a security with odds that are only marginally better than a coin toss. However, what the 7-3-U market breadth sequence is signaling is that the bulls presently have the decisive edge. Therefore, the wager is arguably more rational than it appears on paper.
