Do institutional money managers have a "tell"? In poker, where the pros play the players first, and the "game" second, all are alert to each competitor's behaviors, body language, and habits. Recurring actions of others that can be closely linked to subsequent outcomes are often used by winners to tailor their own tactics of play.
In this more serious of games, stock market pros operate every bit the same way. The objectives are much the same as at the poker table, to win money and bragging rights, but the scale is enormously larger. What keeps the poker game interesting is the players, not the 52 cards and fixed and accepted rules.
In this more serious game, with cumulative outcomes driven principally by the players' repeated shorter-term tactics, there is an overlay not present in poker. New cards get shuffled into the deck all the time, some old ones get lost and accepted rules evolve over time. There are few places where that is more apparent than in the valuation schema offered up for future (or even present) prices of the stock of Amazon.com (NASDAQ:AMZN).
Price-earnings ratios based on next-year-end earnings per share projections, 5-year PEG ratios with unexplained growth rates, "enterprise-value" metrics, and other artificialities are Wall Street's efforts to keep up with the accounting profession's challenge as to who has the most flexible and vivid labeling imaginations or what to do with that which has been labeled.
The winner-score in this game is who has the fattest wallet at the end of the day. So as long as markets are honest (and they basically are when it comes to who paid what for which), then mark-to-market prices are what matters, like it or not. That's where the "tell" comes in.
If you're playing with multi-million-dollar bundles of $275 chips, even in a game that daily has nearly $1 Billion cross the table, it's not always possible to have everything go your way. But help is available -- shills can be hired. They're called market-makers and block traders.
These "helpers" always imply that your interests must come first, even though in some places the word leaks out that this may not always (or often) be the case. But you need help, so you have to show them at least part of your hand, and part of your game plan but maybe not all of either.
Often the same helpers are repeatedly used. Over the span of a few years, with dozens of daily phone conversations, some under severe stress, the helpers become able to identify the PM's "tells." And they use them to protect their firm's capital, which must often be put at risk in the process of being a "helper," by providing the market liquidity to "fill" the stub ends of block trades that the market can't absorb at the moment.
This goes on every market day, dozens or hundreds of times a day, reflecting the competing intentions of the elephants in each stock's serious dance. So, Mom and Pop investors, watch your step (and their steps).
Here is what the AMZN dance has looked like daily over the past 6 months. The vertical lines are not various past-day price experiences, but are the price range expectations for future market quotes, implied by the market-makers' self-protective actions in dealing with the portfolio managers at 933 institutions and mutual funds that hold 84% of AMZN's float. How it works is related here.
(used with permission)
The top of those price range lines indicates where big players are likely to seek better employment opportunities for the capital entrusted to their investment skills. Where they may be attracted is in other stocks whose current prices are down at or near the bottom of the forecast ranges for those issues. Alternatively, where further appetite for AMZN shares exists, the bottom of its verticals indicates where buying activity is likely.
To sense how uncertain even market professionals are with AMZN's value fundamentals, please note how the perturbation of late January put this stock's price up first by $5 one day, and then a further $10 the next, accompanied by corresponding rises in its outlook ranges. After the price the next day could not gain more, ordinary volume brought the closing price back near to where it started, and in following days that decline set off a mini-panic on double and triple average-day volume that put it down about -10% from the one-day high. Oscillations persisted for a while, continuing the modestly erratic price trend since November of last year.
Compounding the problem at present is the current imbalance between market-makers' forecasts of upside prospects in comparison with their estimates of potential drawdown exposures. Upside estimates of +12+% vs. downside possibilities of only -2% are out at the extreme tail of a distribution of such forecasts over the past 4-5 years.
That makes the prospects appear compellingly buy-attractive, since every time AMZN stock has been held to be this cheap in that period of nearly 1400 days experiences, it has been profitable, gaining an average of nearly +10% in less than 8 weeks, for an annual rate of +85%.
The problem is that it has only happened four times in that recent history. Compared to the prior day's forecast, looking apparently only trivially different, there were 84 days with forecasts at least as attractive. We put all forecasts to our time-efficient test of "hold no longer than 3 months if the top of the forecast-day's price range has not previously been reached." When we do that, of the 84 potential buys, 19 closed out with losses, bringing the average return for all down to +7% in typical 9-week holdings, a +48% annual rate.
So what appears now as a nearly "sure thing" winner, with 100-to-zero odds and a big annual rate payoff, was yesterday sporting odds of 77-to-23 and a payoff return rate of nearly half as much. Even so, it was then a better reward-to-risk tradeoff than 83% of the over 2400 alternatives we measure each day.
Does that make AMZN a great buy now, despite the kind of uncertainties evidenced back in January? Perhaps if we take a more detailed look at the market-makers' forecasts it will help.
Please keep in mind that the returns and risks calculated here are solely of forecast numbers. They have not been vetted against experienced reality, under a time discipline, as were the data quoted above. But the numbers in the table do give an idea of the shape of expectations, if not their probable achievements.
Near-term prospects for AMZN are not particularly appealing before the May expirations, and even then they are not all that attractive, because like Apple (NASDAQ:AAPL), it is a momentum stock. And low Range Indexes, where current price is low in the forecast range, is where momentum stocks underperform. The July forecast sees no downside threat at current prices, the worst possible setting for a typical momentum stock.
So, paradoxically, as AMZN's Range Index rises in the January 2014 and 2015 Leap contracts, its prospects for further gains may strengthen.