You’ve all heard the aphorism of buy low and sell high. But have you ever noticed that hardly anyone provides a tangible blueprint for how to actually find these hidden gems?
We’re going to change that right now.
One of the many Barchart screeners that’s particularly helpful for bargain-hunting speculators is the one-day percentage change decline list. As the name implies, it lists out the biggest losers on the day. Usually, people should avoid attempting to catch falling knives. When a publicly traded security loses a significant amount of value in a single session, there’s almost always a reason for it — and not a good one.
With that warning out of the way, I’m going to make an exception for Comstock Resources (CRK). An independent energy company, Comstock is engaged in the acquisition, development, production and exploration of oil and natural gas properties. Per its public profile, the enterprise’s hydrocarbon reserve base is entirely concentrated in the Gulf of Mexico, Southeast Texas and East Texas/North Louisiana regions.
Fundamentally, CRK stock would seem to be an intriguing idea, especially under the Trump administration. However, shareholders would have different thoughts for right now. On Wednesday, CRK slipped almost 4%. In the past five sessions, the security dropped more than 11%. To be sure, the year-to-date performance stands at nearly 13%, making it a very solid name relative to the benchmark S&P 500 index.
So, what gives? It’s difficult to say, although Barchart content partner Zacks reported a spike in implied volatility due to the purchase of a $3 put that expired last week on July 18. Other than that, the news cycle seems dry.
Interestingly, though, the company is scheduled to release its earnings results after the closing bell on July 30. A better-than-expected print or guidance may help lift CRK stock from its funk — and its statistical framework is pointing to exactly that.
Using Objective Truth to Decipher CRK Stock
Scientists and theologians often spar on the existence of objective truth in the universe. It’s a contentious topic, one that I’m obviously not going to explore here. However, I do find the concept of truth fascinating, in part because it’s a rare — possibly near-extinct — commodity in the financial publication realm.
It’s here that many people may have a knee-jerk reaction. Hey, what a minute, CRK stock closed at $20.55 on the midweek session and is priced at 4.91-times trailing-12-month (TTM) sales…that’s truth!
No, I’m afraid those are facts. And what is typipcally considered “analysis” in the financial realm comes down to heuristics formulated from those facts. Sorry for the red pill but once you see it, you can’t unsee it.
Think about all the times we’ve heard experts talk about a stock being offered at a “good price” or a company stumbling on “bad earnings.” But what do those labels even mean? There’s no objective mechanism to determine that since scalar metrics like share price or earnings are unbounded and therefore undefinable.
The only objective truth? At the end of the day, the market is either a net buyer or net seller.
Consider what has been happening in the trailing two months. CRK stock has printed (including the current week) four up weeks and six down weeks, with an overall negative trajectory across the 10-week period. This sequence can be abbreviated as 4-6-D.
It may seem ridiculous to compress the magnitude dynamism of CRK stock into a simple binary code. But consider what’s happening here. In the past 10 weeks, the market has been a net buyer four times and a net seller six times. This is a falsifiable sequence.
When we stack this pattern against others across rolling 10-week intervals (going back to January 2019), we get the following demand profile for CRK stock:
L10 Category |
Sample Size |
Up Probability |
Baseline Probability |
Median Return if Up |
2-8-D |
8 |
75.00% |
50.58% |
4.09% |
3-7-D |
28 |
46.43% |
50.58% |
3.24% |
3-7-U |
5 |
40.00% |
50.58% |
4.28% |
4-6-D |
46 |
69.57% |
50.58% |
4.62% |
4-6-U |
16 |
62.50% |
50.58% |
3.68% |
5-5-D |
51 |
50.98% |
50.58% |
7.23% |
5-5-U |
45 |
48.89% |
50.58% |
7.17% |
5-5-F |
1 |
100.00% |
50.58% |
0.62% |
6-4-D |
13 |
61.54% |
50.58% |
8.57% |
6-4-U |
71 |
39.44% |
50.58% |
3.92% |
7-3-U |
33 |
33.33% |
50.58% |
9.09% |
8-2-U |
1 |
0.00% |
50.58% |
N/A |
Interestingly, the 4-6-D sequence has flashed 46 times. In 69.57% of cases, the following week’s price action results in upside, with a median return of 4.62%. Should the bulls maintain control for a second week, the median forecasted performance is an additional 3.63%. That may mean that CRK stock is on course to hit around $22.28.
As a baseline, the chance that a long position in CRK will rise on any given week is only 50.44%. This is essentially our null hypothesis, our expected performance assuming no mispricing. The beauty of the 4-6-D signal is that the odds now dramatically favor the bulls.
A Rationally Aggressive Trade
Based on the market intelligence above, the 21/22 bull call spread expiring Aug. 15 is awfully intriguing. This transaction involves buying the $21 call and simultaneously selling the $22 call, for a net debit paid of $50. Should CRK stock rise through the short strike price ($22) at expiration, the maximum reward is also $50, a 100% payout.
With earnings coming up next week, though, super-aggressive speculators may consider ramping up the short strike price to $23. In that case, the 21/23 bull spread would offer the highest payout at almost 167%.
Some might wonder at this point about the reliability of the 4-6-D sequence. Running a one-tailed binominal test reveals a p-value of 0.0067, translating to a 99.33% confidence level that the signal is “intentional” rather than random. Scientifically, this metric meets the threshold of statistical significance.
This doesn’t guarantee a successful outcome, to be clear. However, it lets you know that there’s something about this sequence that extends well beyond white noise — and that’s how we can extract alpha from heavily cheapened stocks.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
