Options Corner: Why Overlooked Fintech Specialist Qifu Technology May See A Sentiment Reversal

While chasing the hottest securities can be a lucrative exercise, generally speaking, robust opportunities tend to materialize from names that have stepped away from the limelight. Of course, the question then becomes — how the heck do you find these hidden gems? If every stock that collapsed was a diamond in the rough, there wouldn't be much need for financial analysis. With that said, speculators may consider adding Qifu Technology Inc QFIN to their watch list.

Here’s the deal: Qifu Technology is a Chinese credit-tech platform — falling under the broad financial technology or fintech umbrella — that uses artificial intelligence for consumer and small and medium-sized enterprises (SMEs) lending. Primarily, the company connects borrowers with financial institutions for credit assessment, loan matching and collection services. Further, the platform is capital-light, which translates to Qifu earning fees through loan facilitation rather than through holding debt on its books.

It’s the future of finance but there's a huge overhang. With Qifu operating in China, it is obviously exposed to the nation's economic struggles, primarily stemming from the real estate crisis and a slowdown in consumer spending. So, why bother talking about QFIN stock? Since around mid-May, QFIN has been stuck in a negatively tilted consolidation pattern, suggesting that the skepticism has been priced in.

Moreover, Qifu's financial performances relative to analysts' expectations have been improving recently. Admittedly, between late 2020 to mid-2023, the revenue performance of the fintech specialist was shaky. Since then, however, Qifu has only missed once. With its next earnings coming up on Aug. 12, a positive showing could help shake things up.

Finally, it's worth pointing out that while QFIN stock may not be the most popular idea, it has attracted strong sentiment among Wall Street experts. Earlier this month, JPMorgan Chase initiated coverage on QFIN with an Overweight rating. Overall, the consensus price target stands at $51.73, which is where things get very interesting.

Setting Up An Intelligent Framework For QFIN Stock Options

For those who are bullish on Qifu, the most straightforward approach is to simply acquire its shares on the open market. The benefit here is that you don't actualize any losses until you sell, which theoretically means that you can hold indefinitely until the price is right. On the flipside, options provide incredible leverage but at the risk of principal loss (or worse) if they expire prior to being profitable.

How then should we attempt to resolve this dilemma? Unfortunately, I don't find fundamental or technical analysis to be particularly helpful. Understanding context and color doesn't provide me an empirical clue regarding when the upside potential may materialize. The technical approach largely operates on a presuppositional fallacy regarding the motivations of investors, thereby lacking empirical rigor.

About the only falsifiable assessment we can make is answering this question: at the end of the day (or week, month, whatever), was the market a net buyer or net seller?

The above inquiry forms the basis of market breadth or sequences of accumulative and distributive sessions. By compressing the noise and chaos of price discovery into up and down sessions, we can essentially convert pricing signals into a financial Morse code. This coding changes everything because it standardizes the language of market demand, not just for QFIN stock but for all stocks.

I want to stress this point. Earlier, I scanned 500 of the biggest Nasdaq Composite stocks. There's a reason why I'm writing about QFIN stock and it has nothing — absolutely, positively nothing — to do with vibes.

Conducting the above compression for QFIN stock across rolling 10-week intervals (since January 2019) gives us the following demand profile:

In the past two months, QFIN stock has printed a "3-7-D" sequence: three up weeks, seven down weeks, with a negative trajectory across the 10-week period. Ordinarily, this sequence should cause consternation as the balance of distributive sessions far outweighs accumulative. However, it historically has represented a reversal signal more often than a continuation pattern.

Specifically, in 66.67% of cases, the following week's price action results in upside, with a median return of 8.15%. This is our alternative hypothesis, that a (favorable) mispricing exists. It clashes with the null hypothesis or the assumption of no mispricing. Under this latter assumption, the baseline probability — the chance that a long position in QFIN stock will rise on any given week — is 50.15%.

Ultimately, if the implications of the 3-7-D sequence pans out, QFIN stock could be looking at a target of $45.26.

Booking A Ride With The Fintech Player

Based on the market intelligence above, aggressive but rational speculators may consider the 40/45 bull call spread expiring Aug. 15. This transaction involves buying the $40 call and simultaneously selling the $45 call, for a net debit paid of $240 (the most that can be lost in the trade). Should QFIN stock rise through the short strike price ($45) at expiration, the maximum reward is $260, a payout of over 108%.

Two factors may help the bull. First, an earnings surprise could boost enthusiasm. Second, the 3-7-D sequence has historically led to a sentiment reversal, thus incentivizing a long debit strategy. Running a one-tailed binomial test on the sequence reveals a p-value of 0.1148, colloquially translating to an 88.52% confidence level that the signal is "intentional" rather than random. Scientifically, this does not meet the 95% threshold of statistical significance. However, I would argue that, given the stock market's open system, the 3-7-D is empirically significant.

Besides, how many analysts are running p-values on their assertions of undervalued opportunities?

To be clear, the above statistical analysis does not guarantee a positive outcome. Again, the open nature of the stock market necessarily means that it is a high entropy environment — that's fancy talk for anything can happen. Still, with this empirical approach, we can narrow down our strategy for QFIN stock.

The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.

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