Stock price change potentials beyond corporate fundamentals
The investor-competitive scene constantly changes, both as to the motivated players and their insights about what prices may be coming next. Securities markets provide ways to capture the expectations of the participants in those contests, well beyond “the last war” of competitive history shares of industry revenue and profits.
Long-term stock price trends may persist, but do so only after the interim experiences of those securities provide frequent opportunities to capture substantial profits – and risk damaging losses – as time unfolds. There are continuing, experienced participants in the ensuing competition who are highly motivated by the gains and pains to succeed at what is likely to be coming next in specific securities’ price changes.
Those competitors are the market-making [MM] community, and in prior articles we have repeatedly detailed how the equity and derivatives markets reveal their coming price expectations. They have time-bounded likely price range expectations which are under constant adjustment as events develop.
Ignoring what they have to say (and are regularly saying) ensures the investor who makes that mistake to have portfolio outcomes of almost-competitive market-average returns, along with sometimes shocking market-average risk experiences.
Maintaining a steady securities surveillance
We subject over 2,500 stocks and ETFs to an unchanging daily examination of how these market professionals protect themselves as they choose to put their firm’s capital at risk. Necessary risks taken while performing their essential role of providing the transactional “liquidity” which allows large-volume ownership changes in stocks to occur frequently and promptly.
The result is an ongoing format of highly-comparable measures of the probable size and direction of coming price changes. One illustrated for several information network stocks in Figures 1 and 2.
(note: all materials from blockdesk.com have been approved to be seen in this article.)
This map of the numbered intersections (between the horizontal measures from red scale risks of price drawdowns and the vertical measures from the green scale of reward expectations) which identify the stock symbols in the blue field to the right. Locations down and to the right are good; any above the dotted diagonal line are issues with more risk in prospect than gain.
The positions of Alphabet, Inc. (GOOG) at  and Facebook, Inc. (FB) at  are the result of current investor preferences as to portfolio buy candidates in putting reinvestment-available cash to work. But there are additional considerations which raise questions as to the reliability or severity of the expectations. Still, Figure 1 is helpful for general perspectives.
A deeper analysis of how the strong trade-off expectations at  and  compare with what has happened to these stocks’ prices after similar forecasts in the past can be helpful in evaluating what may be coming in the weeks and months ahead. Several of the alternative stock candidates are also detailed for comparison in Figure 2.
The way which MMs use the markets for derivative securities (futures, options, swaps and other exotic contracts) provides legal and structural leverages, rather than just financial margin stock leverages, making their hedging activities quite effective loss protections.
The extent of those price protections are shown in the [B] and [C] columns. Their upside to downside proportions from current market [D] are indicated in [E]. The Range Index [RI] column [G], tells what percentage of the whole forecast range lies to the downside between [C] and [D].
All the other data in each row is the record of how subsequent actual past market prices met each security’s prior forecasts, but only those forecasts similar to today’s RI column [G] proportions. Columns [L] and [M] tell how many prior experiences are contained, and during how many market days of the past 5 years provided forecasts to compare.
The [E] price gain prospect of today is contrasted with achieved average payoffs [ I ] of all [L] outcomes in the sample, including losses. [H] tells what percentage of [L] were profitable, and [N] tests the promise of [E] with the accomplishments of [ I ].
The dimensions of Figure 1 come from the [E] forecast and from [F], an actual worst-case-experience price drawdown average of all [L] holdings at any point on their way to the [E] target or to a holding period time limit of 3 months. Investment Risk here is what may logically be encountered during similar yet to come exposures, not from some unrelated broad historical exercise.
The Win Odds of [H] are significant in Figure 2’s row by row comparisons. Columns [ I ] reward and [F] risk are weighted in [O] and [P] by the [H] odds and its complement. [Q] is the sum of [O] and [P], and may be used as a figure of merit in ranking these alternative investment choices.
A further critique observes the speed of capital accumulation involving the typical length of holding periods [ J ] in the [ I ] realized payoffs. That may provide attraction in [R], which uses the financial industry benchmark of basis points per day in appraising the odds-weighted rate of reward accruals – and of risk losses.
When we compare the relative attractions of GOOG and FB on this basis, as an investor striving to maximize his/her “at retirement” resources might, FB is the more preferable candidate for capital additions in the portfolio at this time.
We have pursued the article’s opening question of attractiveness of FB vs. GOOG in ranking the rows of Figure 2, in terms of size of Market Capitalization. Based on [R] results, a bigger market capitalization does not appear to be better in their case here. But it may not be so at other future times as market prices change.
That is the advantage of an active investment strategy over a passive strategy. Selecting for emphasis the component with more rapid present opportunity for personal portfolio growth will compound the portfolio’s wealth usually far better than simply locking in a long-term trend which includes substantial low-growth or declining time periods.
To complete the picture of developing price expectations, Figures 3 and 4 show the most recent 6 month trends of GOOG and FB daily price range forecasts in their vertical lines.
Recent Trends of Forecast Price Range Prospects
Other choices may be even more attractive on the prospects of an [R] overall gain basis, but may involve interim loss exposures larger than may be present in FB and GOOG.
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 in the SA blog of my name. First months of 2019 to date have produced over 900 hundred profitable position closeouts at gains substantially better than SPY.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FB over 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.