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, Blockdesk (1,920 clicks)
ETF investing, CFA, portfolio strategy, long/short equity
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Right now, the uncertainty being generated by ideologically-frozen politicians and being hyped by witless media muppets is producing a rare, compressed investment opportunity by depressing market prices, including those of many ETFs, well beyond reason.

The investment circumstances are being recognized by market professionals, and are being reflected in their actions to seek profits while protecting themselves from the unexpected - but only within the reasoning they have developed from years of experience.

One branch of investment analysis and evaluation has promoted itself, largely in academic and quantitative circles, under the label of "Behavioral Financial Analysis." For the most part, its proponents have focused on human errors, misinterpretations, and illusions that are common. Often they have then sought to find ways to capitalize on those conditions financially or investment wise, usually with minimal results.

Several years ago we recognized that key participants in the market-making process of investing had intuitively devised practices of protecting themselves against risk exposures that were required in the successful pursuit of their highly profitable roles. All of their actions are based on an unrecognized and unspoken set of rules that make common sense, which they readily adopt without second thought.

But because these market-makers tend to be, need to be, and are supposed to be better informed than the clients they serve, their actions have forecast content that over many years has been shown to have profitable guidance for investors. We have designed a common means of translating their actions into the range of prices that for them represent a realistic potential threat in each specific case.

This approach focuses on behavior of knowledgeable, experienced people taking the most correct actions possible for their own benefit, instead of seeking out erroneous actions. Our model has not changed in over a decade.

Following the actuarial practices of the insurance industry, we have kept careful record of these forecasts and the subsequent actual price events, investment by investment, on a daily basis. Over 7 million such comparisons have been made on more than 2,000 stocks, ETFs and market indexes in the past dozen years. From those records we can cite likely odds of price achievements and payoff sizes for specific subjects, across the range of possible balances of upside to downside prospects being forecast.

Their forecasts for ETFs are particularly advantageous, since they provide an already-digested compilation of the price prospects for the aggregate holdings in each fund. Here are a number of relevant prospective return and risk dimensions for several most attractive ETFs, based on their Friday, December 28, 2012 implied forecasts and like prior experiences.

(click to enlarge)

Symbols here are for the NASDAQ 100 Index (NDX), a leveraged ETF of NDX (NASDAQ:TQQQ), a leveraged Silver ETF (NYSEARCA:AGQ), a leveraged Technology ETF (NYSEARCA:ROM), a leveraged S&P500 ETF (NYSEARCA:UPRO), a leveraged Materials ETF (NYSEARCA:UYM), and a Swiss Physical Gold ETF (NYSEARCA:SGOL).

The outside numeric data columns, the percentage Upside and Downside, are the current prospective possible price change forecasts. The O&P and R:R Rank columns relate to what the raw history has been of all prior experiences following forecasts with upside and downside balances no worse than those of the present. In both columns bigger numbers are better.

The columns Odds/100, Time Test, and Drawdown all relate to the standard investment proposition that a buy the day after the forecast will be held until it reaches the upside forecast price as a sell target, or until six months have elapsed, when it then will be sold regardless. The Odds number is the proportion of such prior experiences producing a gain. The Time Test tells the average annual rate of return achieved by all of the buys.

Drawdown refers to the average maximum drawdown from buy price cost in all experiences.

There were over 50 day-forecast experiences in the smallest ETF case and several ETFs had over 100 day-experiences, all within the last 4+ years.

The NDX row is intended to provide a sense of present market norm prospects. As an index, it is not directly investable. TQQQ provides a leveraged alternative with 96 experiences of prior forecasts similar to the present, all of which were profitable in the Time Test. Because their average holding periods were less than six weeks long, and their average gains were over +22%, a huge annual rate results. Note how the short holding periods probably minimized drawdowns, despite the 3x leverage.

Here is a picture of how forecasts for TQQQ have evolved daily over the past six months.

(click to enlarge)

(used with permission)

The vertical lines are the implied prospective price ranges seen as possible in coming weeks and months. Position of the then current market price dot within the range gives a sense of forecast usefulness. The colors suggest timely caution or purchase actions.

Each of the listed ETFs had profits in nine out of every ten buys in their Time Tests, a principal reason for their selection in this display.

The inclusion of SGOL is a suggestion of what can be earned in a very low risk situation when limited upsides are captured in a time-disciplined environment. Nothing apparent in world politics suggests that such opportunities have come to an end. No "income" alternatives appear to offer anything equal in return or probable safety.

All of the others as buys offer interesting trade-offs of rates of potential gains against likelihood of achievement. But just because something has happened before doesn't mean it is bound to happen again.

Even the apparently "certain" 100 out of 100 is subject to the rule of "records were made to be broken."

The counter to that notion is: "if it didn't work the first try, good odds ought to be in your favor."

Source: Tantalizing Forecasts Of 5 ETFs, A Political Treat For Behavioral Analysis