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 40, indicating half again 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 305 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 today's are likely to produce different data.
The current RI is right in the midst of the 5-year distribution, often a "let's wait a bit and see which way things may turn" situation. This sample of 305 prior forecasts like today's 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 Alcoa, Inc. (NYSE:AA). It is another of the more intriguing promise stocks of high interest to Seeking Alpha readers and contributors. Its upside prospect is much larger than most selected stocks and is even above the often optimistic average of the 2,500+ forecast population of stocks and ETFs. Its interim price drawdown worst case averages are also above average, but its forecast RI proportions of upside to downside are right at its most frequently encountered point. Divergences seen recently from this day's forecast indicate significantly more optimistic outlooks.
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 305 prior forecasts represents a full quarter of the past 5 years' experiences. The distribution of Range Indexes is quite compact, which means that small variations from the upside to downside balance now seen is likely to paint a much more encouraging coming price picture. This is one of the smaller Dow Jones stocks and can draw disproportionate price attention from large investment portfolios under the right circumstances.
Because of the rather tight distribution of Range Indexes for AA, it is useful to be able to monitor this stock's MM forecasts frequently.
The ability to monitor such forecast trends frequently is provided by subscription access to the daily updates of pictures like Figures 1 and 3, and other comparative tools looking at reward vs. risk and odds vs. % payoffs. Its calendar quarter cost may be only half the cost of one intelligence list depending on how intensively stocks of interest will be monitored.
Meanwhile, there are at least 20 other (than AA) good prospects (Figure 2) to put uncommitted cash to work. The MM Intelligence lists provide the screening and comparisons which economize the investor's 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.