Chesapeake - Price Range As Seen By Big Money Funds, Likely In Next 3 Months

| About: Chesapeake Energy (CHK)


Forecasts are derived from the volume market-making community's reactions to "order flow" from investment organization clients running multiple-billion-dollar funds (the money muscle to move markets).

The pictured trends of daily updated attitudes, as they were expressed in prior days, now subsequently are seen as the current-day expectations.

This isn't a "technical analysis" of past prices. Instead, the forecast results are of forward-looking protective behavior actions. For CHK this time, is an opportunity arriving?

Comparisons of today's expectations for the subject with similar prior upside-to-downside prospect forecasts made in the past five years explain what subsequently happened to its price.

There are no guarantees, but explicitly stated are the odds of profitability now, and the extent of interim price drawdowns and ultimate payoff opportunity, based on actual market history.

Here's my upfront conclusion on Chesapeake Energy (NYSE:CHK): This is a high-risk/high-return prospect. Low prices per share make for large price granularity, where pennies make a significant difference. But there are positives that make a measured commitment compelling.

The past six 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 and indirect way to see just how far up and down market prices of stocks and ETFs are 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 shows the ranges and trend of price expectations -- recent prior to current -- and offers a mini-table of related data analysis.

Figure 1

(Used with permission.)

The vertical lines 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 43, indicating nearly as much downside as upside -- normally not a good proposition. But perhaps 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 three months following each similar RI of the past five years.

The 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 RIs like today's, out of past five years' days of forecasts
  • Sell Target Potential: Percentage 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 samples with profit at three months or on first sell target closeout
  • % Payoff: Average size of all sample closeout prices from their current price cost (position costs are at closing prices of next market day after forecast)
  • 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 five years of daily forecasts. RIs other than today's are likely to produce different data. The current RI is now at the right side of the five-year distribution, a cautioning condition. But being close to the center of that array produces the number of prior forecasts like today's. This sample of 150 is too large to be ignored; its results should 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 shown in Figure 2.

Figure 2


A key strength of Chesapeake is its demonstrated ability to persist in very difficult times, indicated by the stock's ability to recover from double-digit price drawdowns into profitable positions over 100 times just from prior forecasts like the one seen today. That ratio of three-month wins, 77 of each 100, made possible the 5.6% gains for holders, net of losses.

Doing that in only eight weeks on average (40 market days) compounds that 5.6% into an annual rate of 41%. That big return prospect helps offset the near -12% drawdowns so often experienced. The long run here is a sequence of shorter ones with very profitable dimensions. Active management is called for, not "buy and hold."

But this is not a game for the faint of heart. It needs the conviction that the massive natural gas resources commandeered by CHK are an integral part of this nation's shift in energy source fuels from coal and gasoline to electricity. The economics are there to support and encourage that redirection. We will see whether politics will cooperate, and to what extent.

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 two-year weekly history of forecasts.

Figure 3

(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 for Chesapeake. It is one of the most intriguing 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 75 is a record of profits in six out of every eight prior forecasts like today's -- and there have been over 170 of them.

Now, the vinegar in past punch bowls has been a realized profit of only a quarter of what is now being offered. That's 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 Figure 3, a picture of the past two years, makes it clear to anyone ignorant of the company's situation that a stabilization of market evaluations has been under way for over a year.

It appears as if a recovery could actually be accomplished here. But it will take making a break from the resultant experiences following prior forecasts. History argues against it, but the chance of a substantial payoff might be worth taking. A lot depends on an investor's circumstances and preferences. Meanwhile, there are at least 20 other good prospects (see Figure 2) where one can 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. Our website, 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.

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