- The Market-Makers [MMs] fill huge-volume block trade orders placed by big-$ "institutional" funds that are adjusting their multi-billion-dollar stock portfolios.
- Guess which trade orders are likely to move market prices in the next 2-3 months, our odd-lots or their orders?
- Our daily Market Profile reveals the MMs' price-range forecasts embedded in the hedging deals they make to protect the required shorts taken to fill client orders.
- Take your pick: Emotions or intelligence? Combat Generals usually have well-developed intelligence and use them.
The tide of institutional caution or enthusiasm "floats all equity boats." Is your present stock swim activity adequately cash-clothed or have you been skinny-dipping?
Only you can determine whether the question is more a matter of current tactics or of ongoing strategy, and what to do about your decision.
So have a look now at what the MMs' self-protective actions are saying about market-leading stocks like MSFT, WMT, BA, KO, NKE and MCD. Often the MMs are far less emotion-driven, working from planned active-investment strategies. Learn what those plans entail and what they could mean for your portfolio.
Today's Market Profile
(Used with permission)
This is a frequency distribution from the hedging actions of 3,496 stocks and ETFs, all stacked up appropriately at the individual size seen at the bottom horizontal scale just above the numbers 100 and 110. Their stack counts are indicated on the right-side scale.
The numbers of the bottom horizontal scale are measurements of a proportion of the whole range of price uncertainty seen for each equity in the next few months, the part which lies between the current market quote and the likely low price extreme.
Examples: A 50 Range Index [RI] stock has as much upside as downside. A 20 RI offers 4 times as much upside as down. RIs over 100 or negative maintain the same relative proportion scale as those between zero and 100, but clearly indicate extremes.
How many RIs are there above 50? Would you ever buy one at 50 or more? How about stocks now selling at prices below where experienced market pros think are reasonable (negative RIs)? Yes, there currently are more than 25 extremely-low priced equities.
The overall average Range Index for the 3500 issues is about 29. The multi-year range of that average is roughly from 25 to 45, with extremes rarely below 20 or above 50. Check out our past September article on this subject Stock Market Prospects As Seen Now By Market-Making Firms.
There are often cast-off selections on the discount table. But what about the good stuff? How do the DJI stocks look today - compared to each other now (figure 2), and then compared to themselves over the past two years. (Figures 3 and 4).
(used with permission)
The tradeoffs here are between near-term upside price gains (green horizontal scale) seen worth protecting against by Market-makers with short positions in each of the stocks, and the prior actual price drawdowns experienced during holdings of those stocks (red vertical scale). Both scales are of percent change from zero to 25%.
The intersection of those coordinates at the numbered positions are identified by the stock symbols in the blue field to the right. Market-average norms are suggested by SPDR S&P 500 index ETF (SPY) at location  and the DJI 30-stock index ETF (DIA) at . Our focus is on Walmart (WMT) at  and Microsoft (MSFT) at .
The dotted diagonal line marks the points of equal upside price change forecasts derived from Market-Maker [MM] hedging actions, and the actual worst-case price drawdowns from positions that could have been taken following prior MM forecasts like today's. Only a couple of DJ stocks seem fully-priced.
But two others appear attractive, WMT and MSFT. They are pictured in the following Block Trader Forecast [BTF] histories. Their data are regular once-a-week selections of daily hedging-implied price range forecasts over the last 2 years.
These are NOT typical "technical analysis charts" showing only what has been publicly seen in THE PAST. The vertical lines here are forecast price ranges of what was expected in coming markets following the heavy-dot market price at the time of the forecast. Those dots separate upside from downside prospects in each forecast and are the base for the Range Index values pictured in Figure 1.
The trends of those vertical ranges indicate how investor attitudes are moving for each stock as well as the degree of uncertainty involved in each prospect.
(used with permission)
At the bottom of both Figures 2 and 3 are each stock's past 5 year distributions of its Range Index, daily. Similar to the Market Profile of Figure 1, they provide a sense of how cheap or expensive the stock now appears to the MMs, relative to prior MM RI appraisals. WMT at 6 may now be more opportunely priced, compared to its past evaluations, than MSFT at a RI of 30.
Both stocks over the past two years have recovered well from interruptions to their price growths. At present the interruption to WMT is again more severe than MSFT's and may offer more recovery potential, just as it did in the February-March 2020 market decline.
The rows of tabulated data in each stock's forecast trend picture examines additional value considerations not easily handled by pictures. In the table of Figure 5 those added notions are compared for a number of the widely-held DJ-index stocks, along with the ETFs of the market indexes and of the extensive population of all credible MM equity price-range forecasts.
The likely price range forecast for each subject of the table is in columns [B] and [C] with its current price in [D]. [E] tells the upside size of a price move [B] from [D]. The Range Index [G] measures the downside proportion of the whole [C] to [B] range lying between [D] and [C]. That proportion is reported in [G] as a % may be looked at as a potential forecast-risk "cost" of owning or being "long" the subject.
We use the Range Index as a perceived Reward~Risk gauge of coming near price extremes to assemble a sample of prior expectations among institutional investors and their professional agents, the Market-Makers. With a statistically-significant number of prior expectations a comparison of the subject investment candidate of the moment can be made to itself, historically, and used as a normalized projection of how often such prior projections became profitable outcomes in the sample [L] from the available 1261 forecast days [M] of the past 5 years.
In addition to the profitable proportion of [L]'s "Win odds" at [H] we can know the average size [ I ] of the net win and loss payoff outcomes of all [L] forecasts and use it in comparison to the comparison of the current [E] upside potential maximum likely price gain prospect [E]. That [E] vs. [ I ] ratio we regard as the "Credible ratio" shown in [N]. Because [ I ] usually includes some loss experiences [N] typically is less than 1.0, but anything less than .66 is not encouraging.
A more universal "figure of merit" [fom] is obtained by win~loss odds weighting of [ I ] and [F] in [O] and [P] to get a net risk-adjusted reward [Q]. Recognizing the power of time in compounding, [Q] is adjusted by [J] to get the fom [R]. It is the potential "basis points per day" of return on investment from the current forecast.
Here that number for WMT is 17.5, which calculates to a CAGR of +55%. Compared to the current MM community expectations for the S&P 500 index ETF (SPY) at +7.1 of +20% CAGR that is pretty good. And compared to the 3,400+forecast population outlook for only 3.8 bp/day it is way above average.
Still, in today's forecast population the 20 best-ranked capital-gain candidates offer bp/day prospects of +46.8 or over 200% CAGRs. The role that time plays in the Reward member of the R~R tradeoff becomes significant here. SPY at an average holding period of one quarter of the number of market days in a year only allows four compoundings, while the 20 best-odds stocks allow 7 times.
The demonstrated actions to protect themselves by some of the best-informed participants in the investing community leads to the reasoned judgment that there is little likelihood of a serious decline in stock prices in the next few months. In fact, stocks like Walmart, Inc. (WMT) and Microsoft Corporation (MSFT) are currently priced to provide attractive gains from price rises in the next 3 - 4 months. Additionally, as usual, in a stock population of over 3,000 issues there are at least a few other equity issues likely to produce capital gains at CAGR rates in triple digits.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WMT 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.
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. Our website, blockdesk.com has further information.
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