On June 11, I wrote an article for Benzinga noting that bullish speculators may have an opportunity in semiconductor giant Marvell Technology (NASDAQ:MRVL). While I discussed the potentially positive implications of negotiations between U.S. and Chinese diplomats, in reality, I was intently focused on the quantitative argument. Essentially, MRVL stock flashed a quant signal that suggested a high probability of upside.
A week after publication, MRVL popped higher — much higher than I imagined. Of course, that upside is now firmly in the rearview mirror so why bother mentioning it? It turns out that the quant signal that forecasted the higher move is flashing once again.
To be clear, the stock market is an open system, meaning that influencing events can enter the space and wreak havoc on the price discovery process. As such, there are absolutely no guarantees in this space. Still, from an empirical standpoint, MRVL stock could be worth another look, even though it has already gained 26% in the trailing month.
The truth of the matter is that, depending on your time framework, Marvell is potentially undervalued. Since the beginning of this year, MRVL stock is still down 30%, even with the recent performance spike. From that perspective, you might not be late to the party.
It’s also worth mentioning that MRVL stock has recently enjoyed positive sentiment in the derivatives market. According to Barchart’s options flow screener — which focuses exclusively on big block transactions likely placed by institutional investors — net trade sentiment on Monday hit almost $1.026 million above parity, thus favoring the bulls.
While narratives and options flow data paint an intriguing picture for Marvell, these indicators lack specificity. Traders are looking for a thesis that not only addresses the magnitude component (y-axis) but also the time element (x-axis). To accommodate this request requires statistical analysis.
Unfortunately, statistical analysis of the financial markets is a difficult undertaking because of the use of non-stationary continuous signals (particularly the share price). To conduct a proper probabilistic assessment, the dataset at hand must speak a unified language. This is the core reason why I convert the chaos of price action into market breadth or sequences of accumulative and distributive sessions.
As a representation of demand, market breadth is effectively binary, which lends itself to easy categorization. Further, demand profiles can be segregated into distinct, discrete behavioral events, which serve as the backbone of past analogs to extract probabilistic insights.
For example, the past two months of price action for MRVL stock can be translated as a 4-6-U sequence: four up weeks, six down weeks, with a positive trajectory across the 10-week period. This is the same quant signal that I mentioned last month. Admittedly, this process compresses MRVL’s magnitude dynamism into a simple binary code. But the beauty of this approach is that demand profiles can now be categorized for empirical analysis.
With the conversion, we can identify that since January 2019, the 4-6-U sequence flashed 29 times. In 62.07% of cases, the following week’s price action results in upside, with a median return of 4.19%. Should the bulls maintain control of the market over the next four weeks, speculators may see an additional 1.65% of performance tacked on.
To be fair, I’m not expecting a gargantuan leap in MRVL stock. However, past analogs suggest that a price range between $80 to $81 over the next four weeks is quite reasonable.
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