Seeking Alpha
Peter F. Way, Blockdesk (669 clicks)
ETF investing, CFA, portfolio strategy, long/short equity
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Who says so? Just the community of market professionals who average compensations of 7-figures annually, helping big-money-fund portfolio managers shuffle holdings like million-dollar chips at the highest-stakes poker table you ever heard of.

Since they have to put their employer's capital at risk to do it, everyone's skin is in the game, big time. No old, bold pilots here; the pros know when to hold 'em and how to hedge their exposures, or fold 'em when the odds and payoffs aren't right.

With years of experience and deep pockets of capital and information gathering resources behind them, the mistakes they make are few, small, and well recovered on the next trade.

How do we know what they think? They can't protect themselves so adroitly at the scale they ply without leaving telltale footprints behind in the hedge-insurance markets. They can't try to disguise their intent because their cannibal bretheren will eat 'em alive by arbitrage. Markets are ruthless to all comers, pros and newbies alike.

We watch very carefully and know what their actions mean by what they will pay for protection, and how the deals are structured. Been doing it daily, for years, on 2500+ stocks, ETFs, and market indexes.

Then we keep track of how well their implied price range forecasts actually have worked out in subsequent market days, weeks and months. That comprehensive record gives a good sense of when it's time to buy, and when to fly - off to that happy profit-taking playground.

A ranking of the ones that have past records, from forecasts like those showing today, with attractive-sized payoffs, and high win-odds are in the table below. See if you can't find some you like. But spread your risks over several names, since the screen for these is at least 7 out of 8 winners in the past. Take enough diversity (and payoff) to cover that potential 8th one.

(click to enlarge)

Our recommended strategy is to use the top of each forecast price range as a sell target, to be your close-out signal at the first chance you get to capture it. If that hasn't happened in 63 market days (3 months) bail out regardless of price, since you shouldn't invest any more time in this forecast.

Pitch that upside price potential percentage against its next-column neighbor, the average of all worst-case price drawdowns from cost in each prior forecast of the past 5 years that has the same kind of upside-to-downside currently being offered. That comparison is the stuff of the far-right risk-reward column.

The count of those earlier forecasts is shown in the sample size column. That is also where the win ODDS and previous % PAYOFF averages come from. Comparing the forecast upside to the payoff achievements is done in the credible column.

That sell target should stay unchanged regardless, as should the holding time deadline. If a selection doesn't work out, it has to compete with all the best replacement candidates at that point in time. If it does work out, the same test applies, so take the money and run - to the next reinvestment contest among the current-day candidates. Don't hang around to watch your profit wither away.

Risk protection? It's built into the forecasts and their prior experiences, plus the realization that individual selection losses are inevitable in this game. So don't play with the rent money or so few choices that a loss is hard to make up. No guarantees, but sound past experience can help keep lack of confidence from causing bad judgment to make mistakes at the worst possible point. Keep your big-boy pants on.

Source: Scary, Overpriced Market? Here's 20 Odds-On Winners