LABU: Now Best Near-Term Cap Gain Among Leveraged-Long ETFs Say Market-Maker Hedging Deals

Summary

• MMs “fill” Institutional huge Block-Trades by borrowing otherwise unavailable shares, sell short, hedge the short risk, ultimately cover shorts in accommodative market periods.
• Short-risk hedge-sellers engineer their profitable postures using high-leverage derivative securities and arbitrage skills not typically available to the investing public.
• The market-liquidity created defines professional price-expectation limits (up and down) on specific stocks, ETFs, as needed in short-term evolving conditions.
• Those knowledgeable price range forecasts enable high-CAGR payoffs in repeated short-term compounding opportunities among many stocks, ETFs.

Pgiam/iStock via Getty Images

Right now Direxion Daily S&P Biotech Bull 3x Shares (NYSEARCA:LABU) appears best of dozens of candidates.

LABU is an ETF constructed of holdings in several “derivative securities” (options, futures, swaps, and other exotic legal contracts between buyers and sellers, designed to offer profits for either, dependent upon the market-price outcomes of the subject security, known as the “underlier”.) Because derivatives are legal contract agreements with limited lives and most usually define price change events within limited time periods, they may provide attractive leveraged rates of gain or protection from loss during specified time periods. The economic activities of focus for LABU holdings center around Biotech technology developments of importance to several specific stocks.

Investing Thesis

Advancing information technology has modified stock market economics to the point where trade-transaction “commission” costs are so trivial on internet-placed orders that competition now has ended them. Pity not the broker’s firm, still surviving immodestly on high-volume trades demanded by institutional investors skillfully managing multi-billion-$ portfolios daily.

The necessary smoothing out of irregular big, one-sided transactions is the Market-Makers’ assignment, carried out as described in the bullets above. That process provides an insight into the uneven skills present in the institutional money-management trades, where now (unshared) forecasts are created by the most competent analysts and evaluators. They define realistic (evolving) expectations of coming price changes, stock by stock – or ETF.

Multi-year histories exist of those forecasts, and the subsequent actual market prices they projected. That makes useful scores present to guide us to the more reliable investment candidate resources. That is what is presented on many Leveraged-Long ETFs in this article.

Rewards vs. Risks Comparing Leveraged ETFs

Figure 1

(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 by the numbered positions are identified by the stock symbols in the blue field to the right.

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. Best locations for stocks likely to provide capital gains in the near-future are in directions down and to the right.

Stocks on the reward~risk tradeoff “frontier” are URE at [6], and a “market index” norm of Reward~Risk tradeoffs offered by SPY at [8] and SPXL at [19] , SOXL at [17] and UCO at [22]. Our principal interest is in LABU at location [9], offering high CAGR prospect with an outstanding prior proportion of profitable position outcomes.

Those forecasts are implied by the self-protective behaviors of MMs who must usually put firm capital at temporary risk to balance buyer and seller interests in helping big-money portfolio managers make volume adjustments to multi-billion-dollar portfolios. Their protective actions define daily the extent of likely expected price changes for thousands of stocks and ETFs.

This map is a good starting point, but it can only cover some of the investment characteristics which often should influence an investor’s choice of where to put his/her capital to work. The table in Figure 2 covers the above considerations and several others.

Principal questions for all alternatives are “how likely are these outcomes to happen,” and “can their impact be improved?”

Comparing Alternative Investments

Figure 2

(source: blockdesk.com, Author)

Figure 2 presents the MMs’ price range forecasts [B] to [C] for the alternative investment candidates in Figure 1, along with the outcomes [ I ] from their prior past 5 years of daily forecasts with the same proportions [G] of today’s up-to-down Range Index prospects.

Contributing to that comparison are the demonstrated odds of a profit-successful forecast in column [H], its complement of 100 - H, or loss frequency, size of net gain attained [I] and size of worst loss [F] experienced in prior holding periods, so that, when weighted appropriately in [O] and [P], they produce the Net of [Q]. Respecting the power of compounding, [Q] converted into basis points per day [J] of capital commitment at [R] presents a highly comparable figure of merit (fom) for investing preferences where the dominant objective is to build easily liquidated capital to meet emergency, retirement or other planned needs.

By its use as a ranking, the figure of merit (fom) [R] for each row provides an additional measure of attraction, emphasizing the capital gain potential for LABU. Since the [H] odds on wins vs. losses and the [J] holding periods impact [R], the size of samples from which past outcomes are drawn need careful scrutiny but are comparable for all types of equity investments. In these comparisons there are no problems.

Note also please the comparison of these ETFs with the S&P 500 index-tracking ETF (SPY) and with the 3427 securities average for which we here compile forecast population specifics. From that population we use the dimensions illustrated in Figure 2 to rank the most promising and historically evidenced few stocks at present, each based on prior MM forecasts with upside-to-downside balances like today’s in column [G].

Recent Trends in LABU Forecasts by Market-Makers

A substantial decline in LABU market price since November illustrates the volatile nature of developments present in healthcare technology. As if Covid-19 itself were not enough.

The roughly -60% decline from an interim high of $66 portrays the changes in upside to downside prospects defined by the heavy dot in each day’s vertical line measuring the forecast’s price range. Price range expectations declined along with LABU’s market quote until getting below $40. There a brief price and expectations recovery suggested resistance might preside. As it has since, with limited downside between the day-closing price and the bottom of the forecast range.

Most recently the forecast range is suggesting price recovery may be likely. Its scope in the low $50s does not seem overly optimistic given prior experience. But in comparison to other present alternative investments LABU forecasts are quite competitive.

And in comparison to its own experience a price rise from the present relatively low level in its price range forecast (a Range Index of only 15 to the downside vs. 85 to the upside) the small picture at the bottom of Figure 3 provides encouragement to the belief that this kind of a rise is viable.

(used with permission)

Alternative investment Odds and Payoff Prospects

Figure 4 draws on the forecast data provided in Figure 2 to present a visual comparison with alternatives.

Figure 4

(used with permission)

The dimensions here are like those in Figure 1 where most desirable outcomes are down and to the right.

Our principal interest in LABU at location [5] remains encouraging as the largest and most likely from a set of potentially strong alternative holdings of interest.

Conclusion

Direxion Daily S&P Biotech Bull 3X Shares in comparison with dozens of other Leveraged Long ETFs of special-character stocks, appears on a number of bases to be the best choice for near-term capital gain at a prompt rate.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in LABU 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: 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 in our Blog under my Name here on Seeking Alpha. Our website, blockdesk.com has further information.