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 21, indicating 4 times as much upside as downside, normally a good proposition. 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 of 315 similar RIs 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 todays are likely to produce different data.
The current RI is toward the far left side of the 5-year distribution, often a strong positive. This sample of 315 prior forecasts like todays is large enough for its results to be taken seriously.
The population of forecasts this issue is drawn from
The average of current MM population (2581) forecasts and the average of its best 20 are in Figure 2, along with the current forecast for the market index ETF, SPY.
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 may be the case here, now, for International Business Machines Corporation (NYSE:IBM). It is one of the more intriguing promise stocks of high interest to Seeking Alpha readers and contributors. Its upside prospect is only slightly larger than its drawdown experiences following prior forecasts like today's. Its Win Odds of 56 make the potential for a buy today a near coin-flip.
The Figure 3 picture of the past two years makes apparent a stock price rebound is under way. The question here is: How likely is its continuation, and if so, how far and how fast?
Looking at the data row in Figure 1 may help. Or not. The past history of 315 prior forecasts with today's RI nature of 4 times as much upside as downside apparently occurred as IBM's stock was declining. That's not obvious, looking at the right-hand half of Figure 3, a year's rising trend, and at the right side of Figure 1, a 3-4 month repeat picture of the end of the Figure 3 trend.
That conclusion comes from the fact that nearly half (100 - 56 = 44) of the 21-RI forecasts were closed out at a loss. In the process, the 56% of winners were crushed down, making the overall %Payoff of all 315 only +0.2%, essentially a breakeven.
Confirmation of the poor payoff is found in Figure 3 when it is understood that the performance measurement comes from our TERMD portfolio management discipline which requires all (daily) forecast "positions" to be limited to a 3-month holding period and must be closed out by that time if not previously reaching their sell targets.
Looking at Figure 3, the first heavy dots in the forecast-range verticals that are above their corresponding earlier market quote dots are those only of the past two weeks. So if one traces the market prices in the rally period back 3 months to their forecast dates, it is apparent that many, if not most of them involve price losses. Regardless of what their specific RI levels were. Quick visual inspection puts most of the market quotes quite low in the forecast vertical ranges, hence low RIs.
During this two years the MMs were not any help in being able to tell what was precisely likely for coming near-term IBM stock prices. Except, perhaps to note a continuing decline in the level of the forecast ranges from the 170-190 area to the 120-140 level.
This is one reason why the Win Odds are one of our screening tools in selecting the top20 names for the MM Intelligence lists daily. Reference to Figure 2 will show that the forecast population Win Odds average is only 62, while the top 20 average is 83. That is a big difference between 5 out of 8 wins and 9 out of 11.
Other key qualitative measures of the MM forecasts besides the Win odds are the Credibility Ratio, and the Reward~Risk ratio. Even with good odds, the %Payoff achieved when the inevitable losses are netted against gains may be strikingly below what is currently being indicated as upside in the forecast range. When that occurs, the credibility of the forecast is called into question.
One condition that may cause such an outcome could arise from an underlying price volatility that is high in relation to, or may even exceed, the forecast upside. When that is the case, the ratio of Risk to Reward ratio is discouragingly high. Our measure of that relationship is in terms of the forecast reward, so danger is present when the R~R ratio is significantly below 1.0. Strength is indicated above 1.0. Figure 2 shows the top 20 as having average R~R ratio of 1.7, while the overall forecast population average is 0.3. IBM today is (not shown) just under 1.2 (+7.7 / -6.6). SPY is 1.6, derived from +5.4 and -3.3; it has low volatility experience, but also low reward prospect.
Investors can, and should, have different standards for these qualitative considerations, based on their personal circumstances, so we provide them to be used as appropriate, when making selections for portfolio holdings.
The IBM message here is not clear. When it becomes apparent that major investment groups are becoming more constructive to the stock's near-term price changes it should show up in the size of the upside part of the forecast range. Given what we now see in IBM's recent past, that may be a more important indicator than the eventual gradual improvements in %payoffs or Win odds that are more historical in their derivation.
We provide the ability to monitor such forecast trends frequently by subscription access to blockdesk.com data. The daily updates of pictures like Figures 1 and 3 are available on line, 24/7, along with other comparative tools looking at volatility, reward vs. risk, and odds vs. % payoffs. Its quarter-year cost may only be the equivalent of half of one intelligence list, depending on how intensively stocks of interest will be monitored.
Meanwhile, there are at least 20 other (than IBM) good prospects (Figure 2) to put extracted capital to work. The MM Intelligence lists provide the screening and comparisons which economize the investor's personal time investment.
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.