The past 6 months daily forecast trend
Hedging by market professionals to protect at-risk commitments of their firm's capital -- necessary for buyer~seller volume transaction balancing -- provides a sophisticated indirect way to see just how far up and down market prices of stocks and ETFs are believed likely to travel.
An analysis of forward-looking protective behavior actions and how the resulting expectations may favor buys now in BankAmerica. The data suggest an opportunity for a +37% CAGR in BAC shares.
Analysis of specific security market actions subsequent to those revelations provides a qualitative sense of how well prior forecasts like those of today led to profitable positions. Figure 1 pictures the ranges and trend of price expectations -- recent prior to current -- and holds a mini-table of related data analysis.
(used with permission)
The vertical lines here span the range of price being hedged against by the market-making [MM] community. They protect their firm capital temporarily put at-risk to "fill" the "other side" of volume block trades in the subject security on each date indicated. Derivative securities used to provide the hedging protection must contemplate the likely extent of the subject's coming prices.
The heavy dot is the subject's end of day market quote that day. It defines the upside and downside price change prospects held likely. The balance of those proportions is measured by the Range Index [RI]. It tells what percentage of the entire forecast span is below the current market quote. Here it is 39.
The row of data between the two pictures uses the RI's history to evaluate how effective today's RI has been in the 3 months following each similar RI of the past 5 years.
Definition of the data items is as follows:
Range Index: Percentage of High Forecast minus Low Forecast range below Current Price
Sample Size: The number of prior day forecasts at RIs like today's, out of past 5 years' days of forecasts
Sell Target Potential: Percent the High Range Forecast is above the Current Price
Drawdown Exposure: Average of each Sample's worst-case next 3-month experiences
Win Odds: Percentage of Sample with profit at 3 month or on first Sell Target closeout
% Payoff: Average size of all Sample closeout prices from their Current Price* cost
Days Held: Market-day count from forecast day to closeout day
Annual Return: CAGR of % Payoff in number of Days Held of market-days year (252)
Cred.Ratio: Forecast credibility, measured by % Sell Target divided by % Payoff
The lower "thumbnail" picture in Figure 1 shows the distribution of RIs over the past 5 years of daily forecasts. RIs other than today's are likely to produce different data.
The population of forecasts this issue is drawn from
The current MM population forecast averages and the average of its best 20 are in Figure 2.
Some additional forecast history
For historical perspective, Figure 3 provides once-a week extracts of the current subject's daily prior forecasts to form a 2-year weekly history of forecasts.
(used with permission)
Some points in time offer little help on many stocks and ETFs for investors concerned with building capital wealth by equity investment. Such may be the case here, now, for Bank of America Corporation (NYSE:BAC). Its upside prospect is large in comparison to its drawdown history, and its Range Index of 39 is down at an infrequent low (desirable) level of experience. Its Win Odds of 74 is barely passable in comparison to many alternatives, particularly among the best 20 of the 2,500+ forecast population in Figure 2.
The credibility of its historical payoffs from the current RI level in comparison to the upside sell target is only fair, but good enough to support a +37% CAGR. BAC's well-maintained trend of price range expectations augurs well for the longer term.
The analysis of BAC's closely clustered Range Indexes does suggest that FB may be a timely buy here, with its current RI on the less-expensive side of the distribution of its RIs.
In other words, this time may not be the best BAC buying opportunity, but it is now among the better stocks of top interest for Seeking Alpha readers and contributors.
Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors 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 D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they 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.