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Market Outlook: Does Fed Tightening Doom Equities?

Jul. 03, 2017 4:44 AM ET4 Comments
Peter F. Way, CFA profile picture
Peter F. Way, CFA


  • The S&P 500 is at record-high price levels, with a 5-year climb of +78% interrupted only by a couple of -12% brief, easily recovered, 2015-16 interludes.
  • That Index’s SPDR ETF SPY shows Market-maker hedging-implied upside price prospects of +6%, with experienced worst-case price drawdowns of only -2.5% following prior forecasts like today’s.
  • In a comprehensive sample of over 2,500 individual stock forecasts, the upside to downside proportions of similarly derived near-term price ranges average 70% up and -30% down.
  • Forecasts made by Market-makers the same way, but directly on the index itself are (as usual) more optimistic, with only 20% of the uncertainty to the downside and 80% to the upside.
  • Don’t put your money in your mattress, keep it continually and actively working in stocks and ETFs, ones with high odds-on prospects of near-term price gains.

Where are all those doomed stocks?

The ones that the big, smart-money guys are forecasting with more near-term downsides than up? The ones in Figure 1 with Range Indexes [RI] above 50?

Figure 1

(used with permission)

There are at least as many Graham & Dodd value buy candidates at zero RI or below, selling for less than their forecast low extremes.

Doesn’t it seem strange that all that “smart money” either isn’t aware of the catastrophe about to befall the market, despite all the warnings of many past months? Or perhaps they just don’t believe economists, as a principal principle defense.

And this doesn’t seem to be some temporary delusion. Figure 2 shows how the Market-Makers [MMs] have been hedging their bets directly against the S&P 500 index during the past two years.

Figure 2

(Used with permission)

Each of the weekly vertical lines in Figure 2 is a hedging-derived forecast by MMs for coming (not past) price ranges. The heavy dot in each vertical is the index quote at the date of the forecast, splitting the range into upside and downside prospects.

Please notice the similarity of RI skewing to the left in both Figure 1 and in the "thumbnail picture" distribution of the SPX's RIs over the past 5 years.

The rising index prices since the beginning of 2016 have been well supported by rising price range expectations. Nothing appears to suggest a sudden change in prospects, despite what the Fed may say – or do.

Maybe the catastrophe has already happened, but got swallowed up in general economic strength – or in a decision that as long as the price score continues to be kept in US $, it won’t matter.


What’s your guess? (Good as mine.)

Additional disclosure: Peter Way and generations of the

This article was written by

Peter F. Way, CFA profile picture
Peter Way Associates provides daily updated, near-term (3-month) price range forecasts for over 2,500 widely-held and actively-traded stocks, ETFs and market Indexes. Comprehensive results are available on the SA blog of my name.__These forecasts are derived from the way market professionals protect their own capital placed at risk while helping big-money portfolio managers adjust their holdings in multi-million-dollar "block" transactions.__ They cannot be found elsewhere.__Having these price-change prospects available on a continuous basis encourages individual investors to actively and economically build up the values of their own smaller portfolios. PWA only provides information for individual investors; it no longer manages investments for others.__Rates of portfolio capital growth being achieved by subscribers are at MULTIPLES of the growth in market averages, due to the efficient use of holding period time and the compounding of gains a number of times each year.__Risks of capital loss are protected against by insightful selection guidance and holding-period-limit disciplines. The advantages of good selection and careful timing amply cover a much smaller portion of unavoidable losses.__These Market-maker forecasts have several decades of demonstrated productivity. Earlier in the 20th century they were used by large institutional portfolios, and now in the 21st century they are available only to individual investor wealth-building portfolios. Thousands of day-by-day identifications of specific securities having consistent, odds-on profitable results rule out any likelihood of their exceptional outcomes being due to chance. Peter F. Way is a veteran Chartered Financial Analyst, having taken and passed the CFA Institute’s required 3 examinations in the first years they were given, 50+ years ago. Armed with BS in Economics from the Wharton School and an MBA degree from Harvard Business School, he has managed staffs of dozens of Investment Researchers and Quantitative Analysts for the nation’s largest bank, arbitraged index options for NYSE Specialists, and managed portfolios of hundred-million-dollar equity investments for Fortune 100 corporate pension funds and non-profit endowments. He has been elected President of professional Investment Analyst Societies in San Diego and New York City and has served on the editorial boards of the Financial Analysts Journal and the CFA Digest.

Analyst’s 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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Comments (4)

Texean profile picture
Nice to read a well reasoned prognosis. Thanks for taking the time to collect this data.

As the summer doldrums hit we always see the bear leaning authors predicting disaster on the horizon. Yet, so far earnings this quarter are up on the top and bottom lines. Admittedly this is a bit early with only about 15 companies reporting at this point, it still bodes well for the remaining earnings season.

rjstc profile picture
Thank you Peter. What were the MMs outcomes during the late 2000s crash? Were they able to stay ahead of things or were they caught like so many other professionals? Thanks, Ron
Tiki Bar Capital profile picture
Excellent analysis, Peter -- as only you can provide it.

I'm with you and the MM's. We may see temporary pullbacks, but the bull market is intact.
Thanks, Peter, for your positive equities message, which parallels those of Ciovaccio on SA. Almost on a daily basis, being an old, retiree investor, I succumb to the nemesis of fear and feel the strong pull of wanting to go to cash, selling my stocks.

Your reasoned approach helps this Main Street investor regain his equilibrium....
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