We have a special way of looking at stocks and ETFs
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Technology advances in communications and information have transformed the way securities markets operate, and the way major investors behave as a result. Prices of equities now normally gyrate during one-year elapsed periods in ranges that are typically multiples of the underlier's trend growth.
Which means that during part of the year period their prices are retreating, and are consuming investments of time which cause the "growth" trend rates to be far less than what their better progress periods provide.
Advances in information technology encourage investment professionals (the market-making [MM] community) to protect the capital they must put at risk to do their jobs. Those actions cause the markets for equities and derivatives to become more integrated than they were in much of the 20th century.
So we study what the Pros' behavior causes to happen in the price-change "insurance" derivatives markets, to understand just how far it is reasonable to believe specific stock and ETF prices may move, both up and down, in the next few months.
This analysis has been conducted without material change daily for over a decade on more than 2500 widely-held and actively-traded stocks and ETFs. The resulting price range forecasts provide an actuarial history (unmatched elsewhere in the investment community) of subsequent market prices, as testimony to the strength or weakness of the forecasts made earlier.
Near-term price gains are most important to investors who are now either starting out in building a portfolio's wealth and exploring how it may best be done, or to investors who have come to realize that plans made years earlier are unlikely to be met at current rates of investment wealth accumulation.
Active investing, where capital is constantly put to work in the best odds-on situations to deliver profit within foreseeable time horizons, is the strategy most likely to produce what is needed, at least risk. But active investing needs guidance as to what to do, when to do it, and with what intensity.
Active Investing in SA's Top-interest Stocks Now
These stocks at this time are interesting vehicles for Active Investing as a strategy for several reasons, not the least of which is the upcoming changes that may be made by the new Federal Administration. Stocks which normally are subject to deliberate evolution may just get surprising involvements with regulatory changes.
The supporting sciences of genetics and nanotechnology continue to advance, offering myriad breakthrough possibilities in approaches to alleviate various forms of human suffering.
Energy continues to be a controversial field, with extractive technology and natural source capture evolving, not always perceived in the same light by those concerned with the world's ecology.
Interim setbacks and failures keep opportunity valuations in flux among many enterprises. Physical development times and marketing efforts under government regulations and peer review progress vary across international boundaries. Competitive pressures from new organizations' blossoming successes can impact established firms.
Imperfect understanding of the underlying economics by investors, goaded by opportunistic enthusiasm, can create excessive stock price evaluations. Or may lead to undue interim discouragement.
Figure 1 looks at the market activity and dimensions of the top-interest stocks, all of which pass our screens of comparability and attractiveness to institutional investors. There are 20 of them, and are ranked simply by market capitalization size. Those sizes range from the very largest to some relative newcomers only a quarter of $100 billion.
Together they total nearly $5 trillion.
source: Yahoo Finance
Some perspective on this data lies at the bottom of the table. There averages of the more significant columns are compared with their largest and smallest components, and with the same dimensions of the market average NYSEARCA (NYSEARCA:SPY).
Many of these stocks, when looked at from a capital investment turnover point of view, appear to be long-term holds. Total group market capitalizations are Nearly $5 trillion. Their average full capital turnovers take 191 market days, about three-quarters of a 252 market-day year.
In contrast, the market proxy ETF, SPY turns over its $200 billion market cap in less than two weeks, $20 billion a day, because of its extensive employment as a market-wide hedging agent.
The market activity is strong enough to make transaction trade spreads of little concern. Individual investor interest and institutional investment exploration keep trade spreads very small, encouraging the agility needed for active investing.
Past year prices have ranges of modest volatility, with highs averaging only 44% above lows. The most placid stock, General Electric (NYSE:GE), ranged +22%, while the most volatile stock, Tesla Motors (NASDAQ:TSLA) backed away from its high to now be only one-third of the way up its range. Thrills & spills, providing some of the bait that makes the group an attention-leading sector among investors.
But so much for history, what is yet to come?
The street (sell-side) investment analysts offer 1-year price targets for many of these stocks directly, and others are imputed from current P/Es and estimated 1-year EPS collected by Yahoo Finance. On average these targets are at present prices.
But street estimates for the future are tinged with employer conflicts of interest, a condition unfortunately displayed many times in the past.
We find a much more reliable set of future price estimates coming from the same employers as they act in a different, but essential role. That role is as negotiators for big-money investment funds attempting to adjust the holdings in their portfolios.
Due to the clients' typical $-billion portfolio sizes, multi-$ million trades would flash-crash the automated transaction system of "regular-way" trades. So such "block trades" must be negotiated between clients issuing desired trade orders and other prospective big-money investment funds to be on the other side of the trade.
It is rare to be able to "cross" the desired volume of shares at the limit price specified by the trade-originating client, so the market-maker [MM] may become a principal in the trade temporarily, picking up a long or short "stub end" of the block. But that is done only when an acceptable hedging deal can be arranged to protect the MM's capital put at market risk.
The cost of that price insurance is borne by the trade-originating client, so it must not be so large as to kill the trade. So the terms of the hedge, which define the outer limits of near-future prices of the subject stock in the block trade order, are a consensus of all three parties, the trade originator, the MM, and the seller(s) of the other side of the hedge.
It turns out that the sellers of the price protection hedge are often the proprietary trade desks of other MM firms, who are as equally well-informed as the MM firm negotiating the block trade.
Thus we have specific, honest unbiased forecasts of future price limits, both up and down, motivated by the self-serving competing interests of the participants in an open-market negotiation.
Those limits can help define prospective investment reward and risk on an issue-by-issue basis that is directly comparable between alternatives, regardless of their underlying competitive or economic circumstances. Those essential minutiae have been subsumed in the hedging negotiations.
Figure 2 uses those forecasts in making comparisons of price Risk vs. Reward tradeoffs between alternative investments.
(used with permission)
Each stock or ETF is positioned in this map by its intersection of upside price change forecast on the green horizontal scale and experienced price drawdown exposures (on the red vertical scale) typical after prior forecasts like today's. Any issue above the dotted diagonal has more potential risk than return at its present price.
A market-reference by SPY is at . Notably, none of the SA top-interest stocks have less downside risk than SPY. But many of them have higher reward prospects along with their greater price drawdown exposures. Others, like Exxon Mobil (NYSE:XOM) at , Pfizer (NYSE:PFE) at  and the three stocks at  have both poorer prospects for gain than SPY and at prior forecast levels like today's also have had more serious price drawdowns in the next 3 months.
The most opportune on a reward-to-risk basis is Amazon, Inc. (NASDAQ:AMZN) at , with an upside of +13% and a price drawdown exposure of -5%. Next most favorable are Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) at  and Apple, Inc. (NASDAQ:AAPL) at .
Since price-change risk is a dynamic, not a constant, in time these exposure relationships will change. It is these changes that provide fresh opportunities for active investment capital gains on a shorter-term recurring basis. Besides just the downside price exposure, there may be other investment attributes investors will want to consider. Figure 3 provides some of these.
Columns (5) and (6) are the source for Figure 2 coordinates. The (7) metric tells what % of the (2) to (3) range lies below (4). It discriminates among column (12) prior forecasts to select the similar sample from which columns (8) to (14) data is provided. (13) compares (5)'s promise with (9)'s prior delivery; (14) compares (5) to (6). (15) is a figure of merit combining the several qualitative measures into an odds-weighted, risk-conditioned number.
For this exercise we ranked the top equity interests by the (15) figure of merit. At the bottom of the table, in blue, we have averages for the 20 stocks of greatest SA interest, along with a forecast population of ~2500 stocks and ETFs. Also included is an average of the currently best-ranked 20 issues from that population using the (15) figure of merit. The current parallel statistics for market-average SPY are also present.
A comparison of the top 20 SA interest stocks data with the 20 Best-Odds issues from our forecast population provides some interesting contrasts. The SA stocks have both lower upside price change prospects, +10.1% vs. 11.8%, and lower prior price drawdowns following forecasts like today's in each case, -6.7% compared to -7.6%. So they are more reserved, but might be less emotionally disturbing during the period held.
The population top20 produced 11.5% net payoffs from their prospective +11.8% upside targets. The SA top 20 disappointed severely, with average net payoffs of only +2.6% gains while now indicating +10.1% upside targets. Their recovery rate from price drawdowns at only 62 out of every 100, or 5 out of 8 is sadly behind the population top20s recoveries of 82, and is the likely reason for the poor payoffs. So much for avoidance of downside price risk.
The top population stocks have been quick movers, taking 2 weeks less on average to reach closeouts in comparison to the SA favorites, which puts their average prior CAGRs at +93%, while the SA top20 stocks scored CAGRs of only +13%.
We regard the 20 Best-Odds Forecasts from the population of 2400 forecast-able equity securities as the competition in any capital commitment contest to improve a portfolio's prospects. Since Figure 3 is ranked by column (15), the average of the 20 Best of (15) at 39.0 is a bogey of sorts. If half of the 20 Best (15) of 19+ might be a lower limit, the top three stocks in Figure 3 are able, potential competitors as capital commitment candidates.
We every day examine and rank over 2,500 stocks and ETFs to find the most promising 20. No guarantees, but so far in 2016 some 3,450 of these top 20s have shown position closeouts at a CAGR rate of +27.3%, while SPY as a buy&hold has logged only +8.1%.
Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information (earlier) helping professional and [now] individual investors discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.
We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for their guidance what the arguably best-informed professional investors, revealed through their own self-protective hedging actions, believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided. Our website, blockdesk.com has further information.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.