This signal only flashes when the market is too sure of itself
Hey everybody, JD here with your Rational Trader Market Analysis daily.
We’re just gonna keep hammering these Mean Reversion Cash Machine trades.
Lots of companies are reporting earnings this week, especially in retail and the homebuilder sector.
Yesterday we had Home Depot (HD) and Medtronic (MDT)— a bit of a mixed bag, with Medtronic going our way and Home Depot still in play until Friday.
We’ll sit tight on that one and see if it pays out.
Toll Brothers (and a side-rant on the Fed/rate cut question)
Next up is Toll Brothers (TOL), the homebuilder.
The stock is flirting with two standard deviations above the mean — that’s a statistical sign it’s stretched too far from its average and ripe for mean reversion.
Now here’s where the broader story matters. Toll is one of those names benefiting from the market’s narrative that the Fed will cut rates in September.
In my view, that’s not a done deal.
Wall Street’s pricing in a 95% chance. I think it’s closer to 50/50.
Jerome Powell has always claimed he’s “data dependent.” Well, the data right now shows sticky inflation.
And Powell has never shown much foresight beyond what’s directly in front of him.
For the market to expect him to suddenly change character and deliver a preemptive cut? It would be odd, to say the least.
Doesn’t mean he won’t do it. But it lowers the odds. His Jackson Hole speech on Friday will be consequential for this debate.
Back to the trade: with Toll near Two Sigma, I’m setting up a call credit spread — selling the $145 call and buying the $155 call for insurance.
That nets about $1.15 while capping risk at $10 per spread. The “magnet of the mean” should pull this one back, letting us keep the credit.
TJX Put Debit Spread
Next up is TJ Maxx (TJX).
Same situation — trading near two standard deviations above the mean. But the option pricing didn’t make a credit spread attractive.
So instead, I’m using a put debit spread: buying the $136 put and selling the $131 put.
That costs $2.38 on a $5 spread.
We only need a 2.4% move lower for full profit, and I think TJX has the makings of a 5% or greater pullback.
Defined risk and good reward make this a solid trade.
Lowe’s Put Debit Spread
Finally, Lowe’s (LOW).
Some traders like it better than Home Depot — I’ll let others argue that.
What matters is the setup. Lowe’s is also near Two Sigma, and once again, the option pricing made credit spreads less appealing.
So I’m looking at another put debit spread: buy the $255 put, sell the $250 put.
It costs about $2.36 for a $5-wide spread. That’s another chance to double your money if the stock slips just a few percent back toward the mean.
Wrapping It Up
So here’s the lineup:
- a call credit spread on TOL
- put debit spreads on TJX and LOW
And of course our existing Home Depot trade still in play.
All three new setups lean on the same principle — when stocks get stretched too far, the mean has a way of pulling them back.
Add in the uncertainty around Powell and rates, and I’d rather be positioned for reversion than chasing the market’s assumptions.
That’s all for today, folks. This is JD — good luck with your trading, and I’ll be back tomorrow with more setups.
Talk soon,
JD
The Rational Trader
