Your Best Wealth-Building Choice From Today's Top Market-Maker Price Range Forecasts

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 |  Includes: JAZZ, NPO, SPY, UA, XBI
by: Peter F. Way, CFA

Summary

What is most important to you in the way you want to build your financial resources through your stock or ETF investments? Low risk? Odds of profit? Size of gain?

Forecasts of next few months’ price ranges, implied from self-protective hedging by market-makers [MMs], provide a way to cut down the prospect list from thousands to tens.

Actuarial records of how market prices have behaved, following each candidate’s prior forecasts with upside-to-downside balances like today’s, tell how well the MMs saw what was coming.

Differences in risk exposure, price volatility, odds of winning, quickness of price target achievement, and other satisfaction considerations can vary considerably, even among the best.

Here are time-efficient ways to identify choice factors important to you, and use them in improving your chances to achieve your desired goals, when you need them reached.

Many ways to skin a cat, or more importantly, to build one's wealth

The diversity of investment objectives is manifold, evident in the wide range of article subjects here on Seeking Alpha. That is a principal reason why equity investment markets work, finding buyers for sellers, and sellers for buyers. Sheer opinion may work for horse racing, but in investing personal needs and objectives provide a more reasoned and rational basis for choices.

Our focus is on investments, and on investors, where the underlying interest is in building one's financial resources through equity investments. Investments that principally provide current income, and investors well-fixed enough to have that as their overriding goal, are outside of our attention.

The more pressing needs of major personal goals, driving investment actions, usually involve both some substantial cash outlays, often up-front, with inescapable time deadlines. College education for offspring is an obvious illustration, retirement from the working community is another, and resources to cover an unplanned life-changing emergency is possibly yet another.

Equity investments are generally recognized as the most likely means of producing the mental comfort of a financial-reserves backlog to assure that such life needs and desires can be met. But the extent to which we are willing to make trade-offs to have it happen will differ among us.

Those differences are usually acquired over years of experience and need not be changed. Instead, they should be accommodated, so that the ultimate achievement of goals is done in a way that provides satisfaction while involving the most comfort in getting there.

How to do it?

We start by identifying the best day-by-day guides that can be found across the tangled and treacherous equity investment trails. Then we make those guides prove their worth by using their own actions to tell what they thought would soon next happen to stock and ETF prices. Not willing to trust without verification, we then carefully measured all their forecasts with what actually did happen to prices in the marketplace.

Doing that daily, on thousands of equity issues, for over a decade, (approaching ten million instances) provides the actuarial basis for comparing what they apparently think now with what happened to each specific stock or ETF, after their similar day's anticipations, during several prior years. All of the data has been determined live, in contemporary time, with no hindsight back-testing.

It encompasses the balance between size of upside price change and downside price prospects, and actual worst-case price drawdown experiences. Under a constant, rigorously-enforced risk-management discipline, the average gains actually achievable, net of their inevitable losses, the odds of having a win rather than a loss, and the time it took to achieve those results produce annualized rates of return and risk exposures directly comparable between all equity investment subjects.

No guarantees, but while the investment-influencing politico-economic-technologic-fashion environment thrashes about, human nature tends to be much more stable. Identification of high-odds, large-payoff conditions for specific equities, producing rates of return that are multiples of their buy-and-hold trend averages are frequent and numerous.

Until there is a better means, we provide comparisons between equity investment alternatives based on that data.

So, what does it show now?

Here is a table of the best 20 prospects as of Friday, July 18, 2014.

Click to enlarge

Columns in the table are numbered for efficient reference. (2) and (3) are the implied Marker-Maker forecasts of price range for the symbols at date in (1). (7) tells what percent of the forecast range lies below that date's closing price in (4). (5) is the upside price change prospect between (4) and (2). (12) tells how many prior forecasts like (7) have been encountered during the larger number of forecast days available for that equity security, (with 252 per year).

The remaining data items are the product of a time-efficient risk-management discipline that requires a buy at the closing price of the next market day after the forecast day, to be closed out at the first end-of-day price equal or greater than the sell target. If that has not happened in the first 63 market days (3 months), the buy is sold, regardless of gain or loss. A hold is required until closeout action, regardless of interim price drawdowns. (6) takes an average of the worst-case drawdowns in each of the prior buys counted in (12) as our best measure of risk exposure. (5) Is its return-prospect counterpart, while the average prior gains of the (12) buys in (9) measures the credibility of (5) in column (13).

(8) Tells what percent of the prior buys resulted in a profit, and (10) shows the average number of days all were held, so that rates of return can be calculated in (11). (5) vs. (6) provides a simple prospective reward-to-risk ratio in (14). (16) applies the (8) win odds percentage weight to (5) and its complement percentage weight to (6). Combining the two products arithmetically provides an odds-weighted figure of merit suggesting how effective an overall measure of most of the data might rank each of the candidates.

So much for the columns. The rows focus on the investment candidate subjects, screened from a population of over 3,000 with some 2,400 active forecasts on this day, as indicated in the blue summary totals and averages lines at the bottom of the table. The columnar details provide a sense of perspective and comparison for the other blue rows containing data for the market-index tracking ETF of SPDR S&P500 (NYSEARCA:SPY), and averages of the more competitive investment candidates.

At the top of the list are those stocks whose current forecasts, in light of their prior experiences, offer some of the most attractive prospects in terms of the net balance of reward vs. risk, as defined here. Jazz Pharmaceuticals (NASDAQ:JAZZ) and Under Armour (NYSE:UA), a manufacturer-wholesaler-retailer of fashionable-functional sportswear appealing importantly to young adults both score highly on several of the criteria considered.

A quick exploration of the upside forecast prospects, the downside experiences and the previous annual rates of return achieved by such forecasts should indicate that of the 20 candidates surviving the screening, the least by any measure far exceeds what is offered by the ETF market proxy, or the population averages. In short, any of the 20 might be a near-term holding triumph for many a wealth building portfolio. So the relative rankings of the moment as listed may be comfortably rearranged as suits the investor.

How would you rank them?

There is no right or wrong here. Like one military service's litany, there's a right way, a wrong way and (the Navy) your way, which is what really matters.

The basic trade-off between risk and reward can be pictured quite simply in an X ~ Y plot map like this:

(used with permission)

The vertical red risk scale at left draws its coordinates from (6) of the list above, while the return coordinates come from (5), and are measured in the green horizontal scale. Down and right are desirable, up and left, not so. If you are a picture person, this may provide a quick sense of comparisons between the 20 stocks.

Perhaps this tradeoff might lead investors so influenced to be interested in Enpro Industries (NYSE:NPO) at [7], a machinery producer whose products are actively in use by energy fuels producers using contemporary extractive technologies.

A similar means of illustrating how each candidate's dimensions of win odds (8) and pay-off potentials (5) relate to each other, and how the combinations compare among the 20 competitors. Here is how that looks:

Notable in this display is the failure by the market-average index SPY [5] to be competitive with any of the top 20 in either dimension of odds or payoffs. Once again, in this map the more attractive combinations of win odds and payoffs are down and to the right, while the less desirable scores are up and to the left.

For investors seeking strong assurance of a profitable outcome, and willing to sacrifice some degree of payoff size, the SPDR biotech ETF (NYSEARCA:XBI) reaches in that direction, although its previous totally successful experiences at this level of Range Index are no guarantee.

A third visual-comparisons map differs from the Reward~Risk Tradeoff map in that it compares the current downside forecasts of each investment candidate with its upside, while in the R~R map the comparison is with worst-case actual experiences of risk exposure in the form of drawdowns during holding periods.

In general, the downside risk forecasts tend to be more optimistic and less threatening than the actual experiences. That is why we prefer to use the actual history as our risk measurement standard.

The comparison between forecasts and actuals is a parallel to the comparison in the table above shown in column (13) which relates historically-achieved returns (9) against the forecasts in (5) as a test of the upside forecasts' credibility. Still, each map is useful in its own right as a means of keeping watch from day to day in how the relative attractiveness of any set of specified investment candidates is trending.

Conclusion

The many considerations impacting an investment's attractiveness may quite logically cause different investors to reach differing preferences between otherwise highly attractive investment candidates. This article is intended to illustrate some of those aspects with real-life, current forecast examples.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.