After a long ride south, investors are now given the highly debated Q1 results, which did not seem to bring enough surprise to trigger a turnaround in the stock. However, what we see is indecisive investors frenetically buying and selling the stock on expectations of a short-lived rebound, hindered by a lower prospect of revenues for the year ahead.

Digging deeper into the higher frequency data of Thursday, the chart conveys this kind of investors’ behaviour. Disappointed investors who were waiting on the side for the results to come out have dumped their positions within the next 60 minutes, followed by a new wave of buyers who are betting on a rebound, fuelling the daily recovery. While it is well established that Apple is very cheap, this is exactly the constraint limiting the upside as investors are already into the stock and they are the cause behind the dispersion that the iPhone maker has experienced.

Despite the current worries, Apple is building the consolidation base for a rebound, as expectations of investors have now been reset by the Q1 release. A clearer view lies ahead, with investors likely to base their investment decisions on the interpretation of the Q1 numbers and to wait for more rumours to be release about the next conference.

While buying Apple is a good idea, we became aware of a mathematical relationship existing between Apple and one of its Tech peers, which plays exactly at our advantage. In fact, the relationship would imply executing a strategy that we were considering from a fundamental standpoint too. By running a cointegration test on Apple and Amazon for the period from Sept-2000 to the current date, we find evidence of cointegration between the two. The cointegration factor is equal to 2.23, which implies selling 2.23 Amazon stocks for each Apple stock bought. Not only does the strategy have a statistical edge, it is also consistent with the relative undervaluation of Apple with respect to Amazon.

The position should be kept open until Apple and Amazon converge, i.e. the equation Apple_Price – 2.23*Amazon_Price – 30 goes toward zero. The chart displays the value of this mathematical expression over the period 2000-2013.

Unfortunately, while we are writing this trade idea the spread is lowering dramatically; for such reason we suggest to be patient should the stocks display high volatility.


1 Comment

Follow up on last week’s trade idea on cointegration trading | BSIC · 4 May 2013 at 12:12

[…] Last week we suggested to leverage on our quant models to play out the cointegration existing between Apple and Amazon by shorting roughly 2 Amazon stocks for each Apple stock bought. […]

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