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.
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 47, indicating nearly as much downside as upside, normally not a good proposition. But maybe this time the future will be better.
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 lying below Current Price
Sample Size: The number of prior day forecasts at RI s like today's, out of past five 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 three-month experiences
Win Odds: Percentage of Sample with profit at three months 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
* position costs are at closing prices of next market day after forecast.
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 current RI is at the far left side of the 5-year distribution, a strong positive. But that often reduces the number of prior forecasts like today's. Still this sample of 23 is large enough for its results to be taken seriously.
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 weekly interval forecasts
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.
That is not the case here, now, for Chesapeake Energy Corporation (NYSE:CHK). It is one of the most intriguing promise stocks of high interest to Seeking Alpha readers and contributors. Its upside prospect is twice as large as its drawdown experiences following prior forecasts like today's. Its Win Odds of 74 is a record of profits in 6 out of every 8 prior forecasts like today's - and there have been over 70 of them.
The vinegar in past punchbowls has been a realized profit of only a quarter of what is now being offered. It is a testimony to recovery from average drawdowns twice as large as the minimum profits actually rescued in those prior adventures. Double-digit drawdowns.
But drawdowns were recovered from, many more times than not. And the Figure 3 picture of the past two years makes clear to anyone ignorant of the company's situation that a stabilization of market evaluations has been underway for over a year.
This looks like a recovery could actually be accomplished here. But it will take making a break from the result experiences following prior forecasts. History argues against it, but the chance of a substantial payoff may be worth taking. A lot depends on the investor's circumstances and preferences.
Meanwhile, there are at least 20 other good prospects (Figure 2) to put extracted capital to work.
Disclaimer: 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.
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.