Here’s how I spot hot stocks BEFORE Wall Street pours money into them.
Good afternoon, everybody. JD here with your Rational Trader market analysis daily.
In today’s video: how to maximize arbitrage opportunities in a rational market.
How My Daily Arbitrage Forecast Works
If you’re not familiar, one of the core strategies I use is exploiting intraday market inefficiencies — opportunities that show up when there’s a disconnect between where the market should trade and where it’s actually priced.
Each morning, I run a pre-market analysis that incorporates seven different factors to produce an arbitrage score. That score is predictive — at least according to my models — of where the market is likely to trade that day.
Then I compare my forecast to futures pricing. If there’s a discrepancy, that creates an arbitrage setup I can potentially trade right at the open.
In ideal conditions, this can generate anywhere from 50 to 100 basis points in inefficient markets. In more rational, efficient markets — like the one we’re in now — it’s typically closer to 20 to 30 basis points.
Rational Markets = Narrow Windows
Over the past few days, I’ve noticed that my model and the market have been very tightly aligned. The outcomes have been matching the forecasts nearly to the tick — which tells me the market is behaving in a very rational way.
That makes these opportunities more difficult to find. But they still exist — just in narrower windows. And that’s exactly what we saw today.
My Plan to Trade QQQ
This morning, my model gave me an arbitrage score of 2, which typically suggests a 50–100 basis point move.
Premarket futures, however, were only pricing in 20–25 basis points — which created an inefficiency I could exploit. That’s the gap I wanted to fade.
Given the narrowness of the market, I focused on the Nasdaq 100 and planned to trade QQQ at the open.
But in the 30 minutes before the bell, QQQ started climbing — and by the time the open approached, the arbitrage window had mostly dissipated.
The Pivot: SVXY
So, five minutes before the open, I pivoted.
Instead of chasing QQQ and getting scalped on entry, I turned to SVXY, which tracks short volatility. Volatility was clearly drifting lower, but SVXY hadn’t moved — and that mismatch presented a fresh arbitrage opportunity.
I entered the trade at $42.37. Given the tight conditions, I adjusted my expectations and targeted a 30 basis point gain, with an exit at $42.50.
Within the first hour of trading, I hit my target — and actually closed out at $42.52, capturing 35 basis points.
Why It Was the Right Move
Could I have stuck with QQQ? Maybe. But I’m glad I didn’t.
QQQ sold off by 35 basis points shortly after the open — but that outcome was highly uncertain. The SVXY setup, on the other hand, was tighter, cleaner, and based on a very specific volatility inefficiency.
And in rational markets like this, that’s where you want to be — precise, flexible, and disciplined.
Final Thoughts: These Opportunities Still Exist
Even in rational markets that drift gently higher — like we’ve seen lately — these windows still exist. But they require experience and quick thinking to execute well.
I’ve been trading this way for a long time, and I know these setups when I see them. Hopefully, the more time you spend with me, the more you’ll start to recognize them too.
The arbitrage model remains one of the most effective ways I’ve found to generate market outperformance while preserving capital — even in a “rip-roaring” bull market.
We’re up 14% year to date. That’s about 1,000 basis points of outperformance relative to the S&P and Nasdaq.
That’s all for today and for this week, folks.
I’ll be back Monday with another Rational Trader video.
Talk soon,
JD
The Rational Trader
