Most traders chase popular stocks — JD’s 2 Sigma Trader wins big on the ones they ignore
Hey everybody, JD here with your Rational Trader Market Analysis daily.
It’s Tuesday, September 16th and the market served up a little something different today.
Earnings season has dried up, which means my usual “cash machine” setups are thin. But that doesn’t mean we’re standing still.
The daily arbitrage trade is still in play, and with retail sales data hitting the tape this morning, there was opportunity to be had.
Retail Sales: “Spectacularly Good”
The headline number today was retail sales, and the print was, in a word, spectacular. Stronger than expected across the board. On the surface, that should be good news. Consumers are spending, the economy is holding up.
But markets are perverse creatures. For weeks, traders have been cheering bad news — weak jobs numbers, softer inflation, anything that increases the odds of Fed rate cuts. Today’s strong retail data flipped the script. Instead of a celebration, we got a mild sell-off.
That’s because good news can be bad news in this environment. If the economy’s running hot, the Fed has less pressure to cut aggressively. And with expectations already leaning toward a 25 basis point cut (that’s trader-speak for a quarter of a percent), strong data makes it harder to justify anything larger.
Melt-Up Context
This all plays out against the backdrop of what I’ve been calling the Great American melt-up. Stocks keep climbing, often ignoring fundamentals, with traders piling in because prices keep rising.
The retail sales surprise didn’t derail the trend. Yes, we saw some wobble at the open, but the bigger context is still one of persistent strength. Melt-ups can run longer than you think, and the danger is assuming today’s headline changes the whole narrative. It doesn’t.
My Arbitrage Framework
So where does that leave us? Back to the daily arbitrage trade.
When I say “arbitrage,” I don’t mean the academic version of risk-free profit. What I mean is exploiting the gaps between expectation and reality. Every morning, I calculate a seven-factor scoring system to measure those gaps. When the score is strongly positive, I lean bullish. When it’s negative, I fade.
Today my factor score was +2. Not overwhelming, but enough to tell me the odds favored leaning long. Based on the math, I expected about a 50 basis point lift in SPY — roughly half a percent.
How the Day Unfolded
SPY opened strong, reflecting the retail data, but then dipped intraday. That kind of back-and-forth is exactly what the arbitrage system is designed to handle. Instead of guessing whether retail sales were “good” or “bad,” I just followed the factor signal.
With a +2 score, I put on a call debit spread:
- Buy the 660 call
- Sell the 661 call
This structure is simple. You pay a small debit upfront, which caps your maximum loss. Your max gain is the difference between the two strikes minus that debit. In plain English: I risk a little to potentially make a little more if SPY drifts up.
Grinding It Out
The trade didn’t deliver fireworks. SPY ground sideways most of the day, teasing a few times but never exploding higher. That’s the reality of trading — not every setup is a home run.
By the close, I managed to exit with about a 10% gain. Not flashy, but green is green. In a quiet tape like today’s, I’ll take it.
Wrapping It Up
So here’s where we stand:
- Earnings are on pause, so the cash machine is light.
- Retail sales came in “spectacularly good,” which the market twisted into mildly bearish.
- The melt-up remains intact — don’t let one headline convince you otherwise.
- My arbitrage factor score (+2) leaned long, so I played SPY with a 660/661 call debit spread and scratched out a modest 10% gain.
That’s the beauty of having a process. It doesn’t matter if the market celebrates bad news one day and panics at good news the next. You follow the signals, you trade defined risk, and you let the math do the heavy lifting.
This is JD — good luck, and I’ll see you tomorrow.
Talk soon,
JD
The Rational Trader
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