Readers note: This is a why to pick stocks article, not a what stocks to pick piece.
Fresh evaluation and comparisons each market day
The 30 DJIA stocks' prices are evaluated each day by Market-makers [MMs] as they help big-money "institutional" clients make multi-million dollar trades while adjusting their billion-dollar fund portfolios. Trades which would swamp the electronically-managed "regular-way" conduct of the exchanges.
But trades which must be done quietly and quickly. Because those trade orders, if their intentions became known by the general market, would move prices in ways undesirable to the client.
The MM block traders know all the other major holders of each DJ stock, talk with them every day, and have a pretty good idea of which ones are likely to be at least part of "the other side of the trade" currently in question. But maybe not at the trade order initiator's acceptable price. Usually, some large part of the block of shares can be negotiated, leaving the MM to "fill" the client's order by becoming a "principal" in the trade, temporarily owning or shorting what it takes to balance and close the order exchanging the shares and cash or credits.
This puts the MM firm's involved capital at risk of market price change until the position can be unwound. That means it won't be done unless suitable price "insurance" of a hedge deal can be quickly arranged. If not, the trade gets killed instead of filled.
On stocks like these, sellers of such insurance abound. The hedging drives the derivatives markets and defines the range of the stock's potential prices likely to be seen between now and the expiration of the contracts used in the hedge - usually a matter of weeks to months - not long term.
We keep track of what the market does to the subject stock's price in the subsequent months, noting its close on the day of the forecast in relation to the range being held likely to occur. The Range Index [RI] measures what percent of the forecast uncertainty range lies between the quote and the low end of the forecast.
The upside and downside price-change prospects are an everyday feature on www.blockdesk.com, among the "CURRENT FREE EXAMPLES" tab of the site's home page. It looks like Figure 1.
(note: all materials from blockdesk.com have been approved for this article)
Intersections of these expected Reward (green horizontal scale) prospects and experience-demonstrated Risk exposures (red vertical scale) are the products of the current self-protective actions of the best-informed investment market professionals.
Most-favored positions on this trade-off map are down and to the right. Note the locations of SPY at location  and DIA at . On a price-change Reward-to-Risk tradeoff, the best ones look to be Goldman Sachs (NYSE:GS) and Microsoft (NASDAQ:MSFT) at , UnitedHealth (NYSE:UNH) at  and Chevron (NYSE:CVX) and Cisco (NASDAQ:CSCO) at .
But there are other desirable investment traits beside the Risk-Reward issue. Several of them are covered in the columns of Figure 2, the same considerations presented in our recent article on the best DJ stocks to avoid buying now.
Be patient in studying this table, there is a lot to absorb here.
The current hedging-implied forecasts are in [B] and [C], the same data producing the ticker-symbol location coordinates of Figure 1 by means of [E] and [F]. The Range Index [G] value is the percentage part of the whole forecast range below the current market quote [D]. All the other data is historic, using a sample of prior forecasts with RI values similar to today's. Their number and last 5-year daily availability are in [L] and [M].
The history starts with [H] telling what percentage proportion of the [L] forecast sample had a profitable outcome.
That would occur when a buy made the day after the forecast is sold at first [E] sell-target opportunity or, failing that, is sold 3 months after the forecast. A timed-out sale at a price below the entry cost produces a loss, reducing the [H] proportion from being 100 out of 100. The [I] Realized Payoffs include all losses. The [J] Days Held converts [I] to [K] CAGR annual rates.
History finds the truth of today's [E] upside price gain prospect in comparison with [I], in the [N] credibility ratio.
An effort to make the [I] results more comparable between prospective investment candidates uses the Win Odds of [H] and its complement (100 - H) to weight net Reward [I] and Risk exposure [F] appropriately in [O] and [P]. The risk-adjusted return of [Q] as a Net of O - P is made further time-sensitive by [J] by being measured in basis points per day in [R]. A basis point is 1/100th of a percent.
The essence of value is comparison. But the comparisons must be fair, among things measured as equally as possible. Investment preferences will inevitably prevail among investors. Still, it should help to start comparisons out as evenly as possible. That is the intent contained in Figure 2. The supporting data to aid investment selection is available to be used to the extent and emphasis desired by the investor.
There are three investing essentials, Capital, Time, and Perspective. Figure 3 extends Figure 2 into the consideration of what may be possible beyond DJIA stock selections. The first addition tells where the selected 5 DJ stocks (and the index ETFs) rank in each quality feature, from a population of 2,000 other equity securities forecasts made at the same date, and appraised in exactly the same way.
To produce the comparisons of these DJIA stocks with other equity investment candidates simply involved counting the number of better competitors found in our current forecast-able population of 2,568 having measurable conditions on this day. That reduced the eligible total contestants to 2,001.
What should be apparent is that alternative equity investments, in number of scores to hundreds, seriously outrank all of the issues (and the index ETFs) in Figure 2.
Not included is the notion of a reward in the form of a quarterly or other dividend payment. Nor is considered the assurance or concern of such income being paid. The scale of rewards being forecast and historically supported in Figure 2 as CAGRs is on the order of ten times the annual rate of most dividend payments. That more than makes up for the intentional omission.
The Days Held experiences and the 3-month holding period discipline of the analysis should more than equate this analysis as a very serious "income" competitor where spendable capital is an important investing output consideration. For gains not required to be spent, the benefits of compounding reinvestments at the suggested rates in column [K] clearly dominates any "drip" program.
To complete the perspective, the last few rows of Figure 3 make specific some of the top-ranked securities in each of the "ranking" columns, with their accomplished size of the investing consideration involved.
Their presence is not intended as any recommendation but as an opportunity to think about the interrelationship of several of the features under consideration. Daily updates of all of this data are archived as actuarial record sources to support updated MM forecasts. An integration of the top-ranked securities with the particular issue's other decision-impacting factors may moderate its outstanding feature.
For example, the presence of a +49% upside price forecast for Assembly Biosciences (NASDAQ:ASMB) clashes with a (not shown) Realized Payoff of only +2.4% from its historical sample of 59 like forecasts of the past, with price drawdown averages of -15% in average worst-case experiences. Likewise, a +698% CAGR from Direxion Daily Junior Gold Miners Index Bull 3x Shares ETF (NYSEARCA:JNUG) has averaged -30% drawdowns and a Win Odds of only 6 wins out of every 10 positions.
On the other side of the extremes, ProShares UltraPro Short QQQ (NASDAQ:SQQQ), a levered-short ETF of the Nasdaq Index, has had 281 instances of forecasts like today's in the past 5 years, the equivalent of more than one a week. Knowing when to buy it produced realized profits averaging over 50% each, in periods of pronounced tech-stock declines.
Dow Jones stocks carry the rewards of reassurance of being a "family of prestige" businesses. That is important for investors heavily concerned over the loss of investment capital. So far, that is being proved out to be the case in Boeing (BA) where its stock is holding up well in the face of one of the most imaginable threats to a company's wellbeing and competitive ability. But the "protection" has not done so well for GE (NYSE:GE) or IBM (NYSE:IBM). Other DJIA prior components could also be cited.
Fear is a powerful motivator, but in investing, it can carry a too high cost, both in avoided capital gains and lost TIME for achievements. Many far more productive equity investments than the 30 DJIA stocks present themselves, both periodically and some even persistently.
Where improvement in investment portfolio productivity is essential to the investor's financial well-being holdings of investments should be open to broader comparisons of equity investments. Comparisons on a regular frequency of attention should be being accorded NOT simply due to "reputation" (yesterday's?) of long-held positions. Current knowledgeable near-term price forecasts are updated by market professionals daily and can be verified by performance of similar prior forecasts.
In this 21st century, market volatility imbued by advances in information technology and communications technology present far greater wealth-building opportunities than are achievable in multi-year-trend holding positions. Active investment management takes more insight and effort than 20th century passive practices, but can be not only worthwhile but essential.
We all have the potential for living longer than our parents, and our investments may need, because of that, to be made to work harder than theirs.
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 1930 position closeouts with a win/loss ratio near 70/30 at +81% annual rates. Net wins continue, despite market average malaise or decline. Please take a look there.
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.