Early Shifts Occurring In Market-Index Values

by: Peter F. Way, CFA
Summary

Our Market-Maker Price-Range expectations monitoring senses early changes.

Not such imminent impacts as to urge major change; just a “heads-up” to be watchful.

Sensitive securities sectors are losing some earlier-enjoyed price attractiveness.

Leverage is a Two-way Street

ETFs provide a rather clear near-term balance. Figure 1 shows the near-term prospects for prices of the more widely-held leveraged-long ETFs, as implied by hedging of Market-Making [MM] firms to protect their capital committed temporarily while filling volume block trade orders for big-money funds.

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 SPDR S&P500 Trust (SPY) at location [26].

Any locations above the dotted diagonal line register larger price drawdown prospects than as-likely upside price gain opportunity, in the coming 3 months.

The dominant message here is “Leverage at this time can lead to trouble!”

The leverages in these ETFs are operational, rather than financial, caused by the contracts of derivative securities being held, rather than by simple margin borrowing on shares. But either form could be hazardous, and may not be restricted solely to these securities.

A contrast is provided by the same subject back in December, just before the Christmas Eve market bottom. See Figure 2, please.

Figure 2

Note SPY at location [1] here, with an upside seen in December of +13% to +14%, as delivered. Figure 1’s prospect for SPY at its location [26] has about the same -2% downside, but an upside expectation of only +7% now in July.

This alert now has no urgency or panic for the market as a whole, only a caution on the edges. That may be better seen by our overall Market Profile picture, a frequency distribution of MM forecast price Range Indexes [RIs]. First a look at Tuesday, 7/3/2019.

Figure 3

Range Indexes tell what percentage proportion of each security’s MM forecast near-term price range lies between its market quote at the time of the forecast and the low price of the range. Thus, cheaply-valued issues appear at the left, expensive ones at right. Negative RIs indicate current price below the forecast range. An average RI of 34 implies this aggregate population of some 2,700 stocks and ETFs have as a group about two times as much upside price change prospect as downside. There are about a dozen issues off the scale at left which have exceptionally low current valuations.

Figure 4 shows the profile as it appeared Christmas Eve.

Figure 4

And you thought there was no Santa Claus! (There were a few Scrooges up above RI 70)

Conclusion

The Market-Making community knows how to place its bets because it keeps itself informed on a world-wide 24/7 basis. Now is just a time to not reach too aggressively. We would be concerned if the average RI got up over 40+. There will still be (and are now) 20 top-ranked stock prospects presenting profitable purchases.

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 1100 profitable position closeouts at +140% annual rates.

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.