That is the forecast here of market-makers [MMs] in volume trades for big-money-fund institutional portfolio manager clients. Since the MMs have to put firm capital at risk temporarily to make dozens of trades happen each day in those ETFs, the MMs have more than a passing interest in what may happen to their prices.
And the (2x) or (3x) leverages involved make their potential risk exposures more than trivial. The way the MMs choose to hedge their exposures tells just how far they think prices might reasonably get pushed by the clients - in both directions. So let's focus on what their current thinking is about some 30+ of these high-volatility prospective profit (or loss) candidates.
Here is a map of their end of day Tuesday notions, showing upside price change prospects on the horizontal [X] axis, and downside exposure estimates on the vertical [Y] axis. Attractive buys likely towards the lower right, scary ones up and to the left.
(used with permission)
Wide divergences are apparent, which should not be a surprise, given all the potentials for coming chaos out of DC, as seen by a hysterical TV news media army.
Please keep in mind that these outlooks relate to current prices and have a reasonable time horizon of a few weeks to a few months. No long-term, buy & hold fantasies here. But neither are they day-trades.
While MMs buy insurance against hurtful price change possibilities, the contracts they may have to use often are longer-lived than their trade-based risk exposures. And anyone dealing in those contracts expects them to be honored, regardless of when precipitating events occur - whether next day, or just before expiration. The potential for events months out from today are baked into the insurance prices paid by longer-term players, as well as the ones who will unwind them tomorrow.
And our experience is that these forecasts have productive predictive power out 4 to 6 months from now. True, the MMs have a better grip on some situations than others, so we find it useful to keep score on how well each ETF's forecasts are delivered by actual subsequent prices over the next 3 months.
That scorecard is updated through Tuesday, below:
The bottom blue line gives averages for all 33 ETFs, even including those with few prior instances of forecasts like Tuesday's. Check DRN at the bottom, as an extreme example, in the columns labeled Sample Size. With only 2 market-day forecasts out of 4+ years, only the foolish might be satisfied to believe its data without further evidence.
DRN, in its extremes is a useful example to explain other columns of the scorecard, so stay with it for a moment. The first two columnar items are the MMs price range forecast, and the next is its end-of-day [eod] Tuesday price. Next comes the percent change from the eod price to the top of the forecast range. Then everything to the right, except the Range Index, is a product of our standard test of the forecasts.
First, to clarify the Range Index metric: Its numeric shows where the item's current price is as a percent of the bottom-to-top price range of the forecast implied from the MMs hedging. So a smaller RI means less downside risk seen and larger upside values possible. We use the RI as an identification to vet prior similar forecasts with a standard portfolio management policy test of results.
That policy simply uses the forecast range top as a sell target closing out a forecast-date buy position as soon as it is reached, or failing that, a closeout after 3 months (63 trade days) have passed. The test results of all comparable RI forecasts are averaged into each ETF's line in the scorecard.
DRN's tiny sample instances of 2 were both made at market bottoms, so they had zero price drawdowns on the way to their closeouts at profits. That gave an odds of winning such future bets a certainty-level 100%. The payoff of 27% gains as an average of the 2 closeouts upon reaching big upside targets (due to the (3x) leverage) in 15 trade days, produces a huge annual rate calculation. In this case the closeout gains were 1 ½ times the forecast sell targets, in an underestimation of what could happen. Those things can and do happen under big leverage.
One take-away from this list, is that looking back over a five-year time span at forecasts is going to include the 2008-9 markets plunge precipitated by the mortgage-backed-securities frauds perpetrated by the financial community. The 7 ETFs with that length of history available, at current forecast levels, produced a +40% annual rate of gain potential, based on average payoffs of +5.0% and 36 day average holding periods. The 27 ETFs with 3+ years of forecast histories gained a higher +5.7% average payoff in slightly shorter holding periods of 34 days, to show a +50% annual rate average.
So relevant time periods of analysis can be significant in making comparisons.
But also important is how well the MMs seem to be able to appraise each ETFs likely futures. Odds and Payoff size are key in that evaluation, and each past-history-time set is ranked by ODDS of success. Proshares UltraPro S&P500 (UPRO), Direxion Daily Small Cap Bull 3x Shares (TNA), Daily Mid Cap Bull 3x Shares (MIDU), and ProShares UltraPro Dow30 (UDOW) are all ETFs with better than 9 of 10 winning forecasts, and big upside sell targets often met or exceeded, as indicated by the far right column. Another big-payoff name is ProShares UltraPro Industrials (UXI). All have substantial sample sizes, drawn mostly from 4+ years of forecast histories.
Going back to the Reward-Risk map first pictured, note the tradeoff for MIDU  as threatening. A look at the table of what has happened to the ETF following forecasts like today's is instructive. In 64 earlier instances it has taken on a momentum nature, forging on upwards 95% of the time, by a net +2.7% more in the next 12 days, profitable at a +79% annual rate. So things are not always as they appear at first glance. It pays to have as complete a picture as can be had.
If wealth-building is your mission, usually the best bet is to find an ETF that is currently priced such that the MMs have both a strong upside outlook and a high batting average in the profitability column. And be an active investor with clear-cut sell targets and a strict holding time limit, both disciplines you respect and firmly act upon.
Leveraged-long ETFs are instruments bought to be sold, not held beyond their productive opportunity. More good chances await out in the future. Just give them time to develop, watch and wait, and act when the prospects become attractive. (Hint: like UDOW may be now)
(used with permission)