The Middle of Range Concept IS the Strategy in a Bull Market
Middle of Range + Time + Catalyst = Upside
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If we look at this example market structure below, what do we see?
We see a Range High, a Middle of Range, and a Range Low.
In a bull market, which we are in right now, most stocks are highly correlated with the S&P 500 (SPX). If SPX goes up, most stocks will go up.
But what happens if we are at very overbought levels for SPX? Do we just avoid stocks altogether?
Not necessarily.
We focus on Middle of Range (or if we’re lucky, Range Low) quality names as the primary focus.
Here’s the difficulty. In order for a Stock to go from Range Low to Middle of Range or from Middle of Range to Range High, it needs a Catalyst.
Each range is like a Gatekeeper. The Gates open when there is a Key. The Key is often some type of Re-Rating from an earnings event, some type of new product launch, or increased confidence in gaining a larger Total Addressable market. This will result in an analyst upgrade, which then strengthens sentiment.
How do you understand if the Gates are likely to open? We understand this by DCF Modeling.
Take Accenture (ACN) for example.
Looks like we’re at Range Lows right?
But what if I told you that based on my DCF model, this level here is actually already Base Case? This makes sense because a ton of government contracts are being on pause for Accenture, resulting in forward margins and estimates being tamed down.
For this reason, pure technical analysis is insufficient to understanding whether a stock’s price is under or overvalued.
It must be combined with some type of valuation context, like DCF Modeling.
In the chart example at the beginning of the email, T-Mobile’s Fair Value was always 245+, at least according to our analysis.
When we traded beneath it in the 230 area, all we need was 2 things to unlock the 245/share Gate: Time + Catalyst.
Earnings came. They were good enough. Stock revisits Fair Value. Notice that as it tries to “impulse” higher above at 250, the time spent there is short-lived.
Intrinsic fair value is the ultimate invisible magnet in the market that stocks will eventually gravitate to.
Only seen if someone has done the behind-the-scenes research.
How is this concept of Middle of Range applied?
Simple.
We first must see whether the company is at its Range Low, Middle of Range, or Range High.
In a bull market, buying at Range Highs is often still okay. But personally, I prefer not to do that.
The Art then becomes to identify whether the current pricing reflects a Bear, a Base, or a Bull Case.
This is then done with a DCF Model.
If the Middle of Range technical structure reflects a Base Case or under, and there are upcoming catalysts that could cause a re-rating, then I participate.
These are the types of situations where upon an earnings beat (even a slight one) or a peer Earnings beat to revitalize the sector sentiment, the stock is instantly re-rated back to Fair Value.
But the only way you would have any confidence that it would make such a move is if you know what the stock is worth.
See below. Here are 3 most recent examples out of 10 that we participated in that have resulted in a stock that was between the Bear and Base case get re-rated back to Base case over the past 3-4 weeks.
Sometimes we won’t always get exactly the bear case.
So - if a stock trades underneath the Base Case, I do begin to build a starter position, especially if the S&P 500 is still constructive.
On T-Mobile: Catalyst is Earnings to revisit Base Case
On Deck: Catalyst is Earnings to go from Bear to Base Case
On Salesforce: Catalyst is Peer Earnings Service Now to revisit Base Case (previously mid-point of Bear & Base)
These are 3 recent examples of the Middle of Range concept being applied in high-probability type of manner.
This is why we SURGICALLY look for Middle of Range names.
It is extremely important to understand that stocks take anywhere from 30-60 days to even begin going from one Range to another.
Patience is of utmost importance at these index range highs.
There are actually a few more Middle of Range stock-selection concepts that I think can work over the next 30-60 days.
There’s too much focus on whether the stock market is about to “top” and whether a correction is coming.
How about just focus on Middle of Range ideas instead with DCF Modeling?
We’ll discuss the upcoming opportunity set and their DCF models inside Discord.
As earnings season heats up THIS immediate week, I think the opportunity set will grow very soon.
Stay tuned.
Resources inside.
Investing Resources:
Interactive Brokers: Best brokerage with Event Forecasting for Macro Outcomes as well as international trading (U.S., HK, Europe).
Menthor Q: Options Dealer Positioning
TradeZella (Trading Journaling Software)
Orderflow with Bookmap
Instagram (I have one account only. I will never message you first. Be careful of impersonators): https://www.instagram.com/larrycheungcfa/