Petrobras Brasileiro (NYSE:PBR) has been one of the fortunate names that have largely avoided the midweek session rout, brought on by fears of escalating U.S.-China trade tensions. However, that doesn't mean PBR stock has escaped scot-free. In the trailing month, the equity declined by nearly 9%, a consequence of broader market jitters. But among the most actively traded securities, PBR arguably has flashed the most compelling reversal signal.
What's interesting, though, is that this signal isn't at all obvious from traditional methodologies. For example, the proponent of fundamental analysis may point to PBR stock trading at a trailing-year earnings multiple of 5.81. That's well below the multiple of 9.34 at the halfway point of the year. It's also in subterranean territory relative to the 19 times multiple of the integrated oil and gas sector.
The problem with the above analysis is that raw multiples are context-driven ratios, not universal truth claims. Without normalization, the onus is on the analyst to provide evidence that the target security will return to a rational valuation — or what rational even means.
Technical analysis isn't any better. While an expert can cite the 9% trailing-month decline as evidence that PBR stock is due for a comeback, the onus is again on the technician to demonstrate the likelihood of a reversal as opposed to a continuation of volatility.
In the fundamental and technical approach as it's commonly practiced, both the premise and the conclusion stem from the author making the claim. That's fine if the author has a natural gift for deciphering the market. But by definition, such analyses are ego-driven and are thus disqualified as actual analysis — because the object of study becomes the analyst, not the phenomenon.
Diving Into The Quantitative Aspect Of PBR Stock
To be fair, fundamental and technical analyses offer narratives and are easy for the average reader to digest. Subsequently, the two methodologies (for better or for worse) will likely remain foundational to the financial publication industry. That said, more investors are gravitating toward the quantitative approach because the premise is built upon observable realities.
At the core, quantitative analysis is the study of pricing behaviors for the ultimate purpose of making trading decisions. It sounds like technical analysis except for one devastating difference: falsifiability. A quant's methodology is based on factual premises that can be replicated by anyone. Almost nothing about technical analysis is factual or falsifiable, other than the historical price data upon which technicians build their assertions.
From a practical perspective, a key advantage of the quant approach is that it can spot signals that the two traditional methodologies are blind to. In the case of PBR stock, the security in the trailing 10 weeks printed a 4-6-D sequence: four up weeks, six down weeks, with an overall downward trajectory.
The sequence itself isn't really important. Rather, the importance is that the projected 10-week returns associated with the 4-6-D form their own population group relative to the parent dataset, thus creating a bimodal distribution. Moreover, the sequence's probabilistic curve extends upward, with price clustering evident around the $12.20 mark (assuming an anchor price of $11.63).
That's significant because under baseline or homeostatic conditions, price clustering would be projected to occur around $11.70. Empirically, we can observe under 4-6-D conditions that median price outcomes shift northward by roughly 5%.
Another exciting aspect about the aforementioned sequence is its exceedance ratio or the profitability rate. Under baseline conditions, the chance of a long position being profitable over a 10-week period is 52.7%. Under 4-6-D conditions, the ratio rises to 70%, with the terminal median price expected to swing up by about 12%.
To be clear, the sentiment regime can always change so the probabilities should not be considered absolute. It's just that under the empirical condition specified and assuming temporal continuity, the bulls empirically have better odds of long-side success relative to the baseline.
One Trade Stands Above The Rest
As a highly speculative enterprise, Petrobras isn't for the faint of heart. For those who want to take the risk, however, one trade is conspicuously attractive: the 12/13 bull call spread expiring Dec. 19. Basically, this transaction will require PBR stock to rise through the second-leg strike ($13) at expiration. If it does, the maximum payout stands at almost 285%.
Make no mistake about it: this is a tough trade because the breakeven price stands at $12.26, which is more than 5% above the current market price. However, prior responses to the 4-6-D sequence project a sustained rise in the terminal median price.
Stated differently, over the next 10 weeks, prices are likely to cluster around $12.20 on average. However, on a week-to-week basis, the actual landing price could be higher.
Of course, the counterargument is that unknown exogenous factors could sink the price, thus busting the above trade. Obviously, there's no such thing as a risk-free options trade. But if you're looking for a rationally speculative idea, it's really difficult to ignore the quant signal of PBR stock.
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