false reinforcement | Outlier Insights
Welcome to Outlier Insights!
Each week I work hard to gather and curate information for your convenience. There are two main topics to the newsletter:
Market Analysis is where I share 15 high summary points for the market from the week prior.
Erik’s Brainstorming is where I share a couple ideas to watch each week along with my perspectives; often market related, sometimes not.
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Be an Outlier!
-Erik
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1. Market Analysis.
Here is a summary of this week's market news in 15 bullet points:
Record Highs for Major Indices: The S&P 500 and Nasdaq Composite surged to new all-time highs.
Positive Market Sentiment: Investor optimism was fueled by signs of easing global trade tensions and confidence in a resilient domestic economy.
Inflation Remains a Key Focus: The Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge, indicated a persistent, albeit modest, increase in inflation.
Steady Economic Growth: The final reading for first-quarter Gross Domestic Product (GDP) confirmed a steady pace of economic expansion.
Mixed Consumer and Housing Data: While consumer confidence saw a slight dip, overall sentiment remains positive. The housing market presented a mixed picture with varied data on new and pending home sales.
Consumer Discretionary Leads Sectors: The Consumer Discretionary sector was a top performer, largely driven by strong earnings from prominent retail and apparel companies.
Nike Soars on Strong Earnings: Shares of Nike (NKE) jumped significantly after the company reported better-than-expected quarterly results and provided an optimistic future outlook.
Micron Beats Earnings Expectations: Micron Technology (MU) also delivered a strong earnings report, surpassing analyst expectations for revenue and profit.
Other Notable Stock Gains: Darden Restaurants (DRI) and CarMax (KMX) both saw their stock prices rise following positive earnings reports.
Kroger Gets an Upgrade: Supermarket chain Kroger (KR) received a stock upgrade to "Outperform" from Telsey Advisory, contributing to its positive performance.
Accenture Sees Shares Decline: In contrast, professional services firm Accenture (ACN) experienced a drop in its stock price following its latest financial disclosures.
FedEx Reports on Cost Cutting and Shareholder Returns: FedEx (FDX) announced it had achieved its $2.2 billion structural cost reduction target for fiscal 2025 and had returned $4.3 billion to shareholders.
Volkswagen to Invest in Rivian: Rivian (RIVN) announced a significant investment from Volkswagen and reported its second consecutive quarter of gross profit.
Analyst Initiates "Buy" on Next plc: Cowen & Co. initiated coverage on retailer Next plc (NXT) with a "Buy" rating, signaling confidence in the sector.
Future Outlook: Investors are now looking ahead to upcoming labor market data for further indications of the Federal Reserve's potential interest rate decisions, with a close eye remaining on international trade developments.
Economic Events for Next Week.
(from Trading Economics)
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2. Erik’s Brainstorming.
Markets are tricky. We discussed the concept of path in a recent newsletter - which is the sequence of an observation. I was poking around Reddit and noticed a post saying “I made $XX using a classic volatility extension reversion.” They went on to discuss their analysis of IV being too high and price going up “for no reason” so they bought a put.
The absolute display of trading proficiency is performance sustained over time. In the short term, we can make money on trades for the entirely wrong reasons.
For example, the long put they bought is the incorrect expression for that idea. This ineffectively isolates volatility being extended. The trade was effectively a churched up directional bet that actually would be negatively impacted if volatility did indeed contract.
This was simply a trade that happened to be directionally correct and make money for the wrong reasons.
Yet, in their mind, this was a well thought out idea and simply reinforces their misperception. The unfortunate reality for them, is it likely won’t be for some time but eventually their returns will approximate to their capabilities.
If I were to dig deeper on this strategy, I likely would find it’s not well studied and if we tested the approach on a large sample, it likely would perform poorly. This is a classic example of the Dunning Kruger Effect. There’s also another important lesson. Despite this, they made money.
There is a balance between a haphazard approach and taking educated risk. The trader we looked at today is similar to an out of control car - it still might be moving in the correct general direction but likely won’t be for long. Yet, if we stay at home waiting for everything to be perfect before we drive - we get nowhere.
The idea is to strike a balance between effectively researching and not being a bitch to actually put some risk on.
Be an Outlier
Erik
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The content presented is for informational purposes only and any opinions, news, research, analyses, or other information contained are provided as general market commentary and do not constitute investment advice. Outlier Trading, its affiliates, and employees are not responsible for any investment decisions made based on the information presented. We do not guarantee the accuracy, completeness, or reliability of any information presented and are not liable for any losses or damages arising from the use of or reliance on this information. By accessing this content, you acknowledge and agree to these disclosures and terms of use.