Get Outa This Market!

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Includes: DIA, MRK, MSFT, SPY, UNH
by: Peter F. Way, CFA

Summary

Better hope so, because that could be a good buying opportunity. When (if) it does, and you can recognize when it has gone about as far as it will.

But meantime, what to do with the cash? We know some folks who have to keep cash in the market; what do they do? They buy insurance to protect it.

How much insurance tells how far these Market-Makers think each stock’s price is likely to go. Both up and down. But not evenly. Sometimes, like now, a lot more up than down.

Their insurance for the best DJ-30 stocks now protects coming price gains at +40% to +50% annual rates. Could you stand your investment cost being -3% under water temporarily?

Extensive research * warns of an impending market decline

“Everyone knows” this is certain to happen. It has before. (* they know by looking back at recent market averages which are higher now than they have ever been.) But what to do with the cash? Why not put it somewhere its interim distresses are not likely to be the -40% to -50% that some market indexes have encountered? Especially when other folks, maybe better informed than we are, are not willing to spend good money to protect against such a disaster.

The Alternative (safe) Hiding Place

Right where it won’t be looked for, and will be easy to retrieve, if and when it’s wanted.

In the best Dow-Jones stocks that can be found, Microsoft, Inc. (MSFT), or United Health Group, Inc. (UNH), or even Merck & Co. Inc. (MRK).

When those Market-Makers [MMs] get called on to produce hundreds of thousands of shares of one of these stocks by one of their investment fund clients running a multi-billion-dollar portfolio, the client doesn’t want the rest of the “street” to know they’re buying, so it has to be done quickly and quietly, or the price may run away from them.

Often the MM can’t round up that many sellers in volume that quickly, so the MM has to “short” the stock on its own book to “fill” the client’s trade order. That’s why the price-change insurance is needed.

This goes on all the time, every market day, and is what really moves most big-cap stocks. What it is now producing for upside and downside price-change prospects of the Dow-Jones stocks is shown in Figure 1.

Figure 1

(note: all materials from blockdesk.com in this article have been approved.)

Upside price-change prospects derived from market hedging in these stocks are shown on the horizontal green scale, while actually-experienced investment cost price-drawdowns from such forecasts are on the red vertical scale. Both scales are zero to 25%. Down and to the right is good.

MSFT is at location [8] and UNH is at [5]. CSCO at [15] is the product of a critically small data sample.

Many other considerations important to the thoughtful investor need attention, and are covered in the table of Figure 2, providing comparisons.

Figure 2

The price-change potential forecasts from hedging are in columns [B] and [C]. An upside percent change from [D] to [B] is in [E] and typical worst-case interim price drawdowns encountered on the way to such [E] sell-targets by a buyer are shown in [F].

Prior forecasts like today’s are used as a sample [L] out of the past 5 year’s daily histories [M] to collect those [F] experiences, and the net average gain payoff [ I ]. The odds of the [L] sample forecast outcomes producing a profit are in [H], and the calendar days [J] it has taken, on average, to produce the net gains are calculated in its annual rate CAGR of [K].

Other qualitative measures are the [N] credibility of the [E] upside price forecast in light of the [ I ] actual net payoff, and the use of the Win Odds [H] and its complement to weight the rewards and risks of [ I ] and [F] in columns [O] and [P]. Their weighted net [Q] is used with [J] to measure the “speed” of capital accumulation by basis points per day (bp/day) in [R]. For reference:
19+ bp/day, sustained for a year, builds capital at a CAGR of 100%.

What does all this mean?

Figure 2’s rows are ranked by [R] as an integrated overall measure. Individual investors may prefer to put their personal emphasis to the components of an investment capital commitment in several other proportions.

The data rows for the SPDR S&P500 Index ETF (SPY) and the DOW-Jones Index ETF (DIA) are shown for comparison. Both MSFT and UNH are substantially more assured and more promising than either of the ETFs as to Win Odds, forecast credibility, and CAGRs. They are basically competitive in terms of interim risk exposure, and are far ahead in terms of bp/day.

Conclusion

Nervous about the market crashing? The MMs are only concerned to the fairly trivial extent indicated by their protections sought on SPY and DIA. Concern over MSFT and UNH lies in their being short these stocks, where they have a high confidence in the need for that exposure being protected. Not bad news for a buyer.

If you have other holdings making you nervous or fearful, sure, cash ‘em out and put the capital into new holdings of MSFT, and UNH or even MRK if you want diversification.

Cash isn’t going to pay you much in the next 3 months, but these stocks could help your wealth-building task very well. When it’s time to compound their gains with fresh choices, come back and we will take a fresh look at what might best be next.

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.

Additional disclosure: 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.