But in this era, we are overwhelmed with information
TMI. Too Much Information. Dammed internet; Wiki-ed infoheap! How to handle it all?
Artificially? Get computers to do it? « A.I. »? What could possibly go wrong .. go wtong..gq wxong..go. . .
Instead of having machines pump out « artificial intelligence », we turn to the human beings whose livelihood and well-being depend on being better informed than their customers. They are the market-makers [MMs] who negotiate multi-million-dollar « block trade » transaction deals among institutions adjusting the holdings in the institutions’ billion-dollar portfolios.
If the MMs don’t know at least as much as their clients, the clients won’t hesitate bagging them on any trade, for as much as can be taken. The motivation to be knowledgeable is extreme. The MM community of over 50,000 employees have had world-wide information-gathering systems positioned for many decades, with instantaneous communications systems pumping REAL INTELLIGENCE to the trading rooms.
Human brain power exquisitely trained in arbitrage is a « parallel processing » system of more capable capacity than anything Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) or others can match. I have been an inside participant and observer of the process, and my blog will give you a sense of how market-making works. My original intent was to do some of that in this article.
Continually revised forecasts of specific stock price change prospects are available to guide investors on the mission of wealth-building by day-after-day active investing strategy. You should know that they exist and how they can be used.
How about an example?
We can take the implied price range forecasts drawn from the hedging actions of market-makers, actions verified by public records in derivative markets, for Apple, Inc. (AAPL) measured daily in exactly the same way, since the beginning of this century, in the year 2000. To date, we have over 4,800 market days’ worth of that data, providing over 4,800 calculations (from the range forecasts) of the prospective upside and downside price changes from the current market quote to the forecast extremes.
We measure the imbalance in up-to-down proportions by noting what percentage of the WHOLE range is contained in the downside forecast and label that as the Range Index. Example: Forecast for XYZ, now at 20 in a forecast range of 10 to 50. Range = 40; market of 20 and range bottom of 10 = downside potential exposure of 10 in a range of 40 produces an RI of 25. With no change in the forecast, a market price of 30 would be an RI of 50; a market price of 50 = RI of 100; market of 54 = RI of 110, market of 10 = RI of zero, market of 6 = RI of -10.
The Range Index at each day of forecast provides a way to group forecasts from different points in time which have similar proportions of outlook imbalance, to see what outcome experiences might be encountered in times yet to come. Here is the array of RI forecasts at different levels across the past 19 years from 2000.
Source: blockdesk.com (all figures)
Along with the forecast highs and lows, there are exchange records of the subsequent actual market prices for all of the forecast dates, up to the present. We can apply the portfolio position entry and exit rules of TERMD to each position to obtain their exit prices and develop investment scores by means of price changes thus accumulated.
Doing that, we discover something rather interesting – AAPL is a momentum stock, not a Value stock. Figure 2 shows the proportion of forecasts at each Range Index which have profitable positions at the close of their TERMD holdings. The orange line indicates the percentage of that level of forecasts which were winners.
Very cheap (low or negative) RI forecasts typically produce wealth-building results for both value and momentum stocks, but high RIs (on the right) usually produce serious losses for value stocks. The trend of Win Odds for value stocks at progressively higher RIs is typically a declining one. With AAPL, what we see is a strongly rising set of favorable outcomes [wins] as RIs increase.
Please keep in mind that Win Odds of less than 50 indicate more than half of the outcomes are unprofitable. For much of the blue-line count of forecasts at low RI levels, the orange Win Odds line is below 50. The Win Odds line rises into net profitable circumstances as the blue line count of forecasts starts its decline.
While AAPL is a frequently-held stock in many institutional portfolios, its trading activity most of the time seems to be from trend-following, buy&hold, individual investors. They tend to have a more passive investing strategy, than the price-sensitive professional institutional investors intent on actively managing holdings in value-driven securities.
Those trend-following investors are more likely to buy either initial or incremental positions when things look good and AAPL’s stock price is increasing, rather than when the stock has gotten progressively weaker and Range Indexes are low.
Please remember these pictures are of outcomes grouped by Range Indexes, not by dates. These are behavioral histories, not chronological ones.
And the odds measure the absolute outcome of win or lose, not the size of a contribution to or a deduction from the portfolio’s wealth. Figure 3 relates the size of price change payoffs to their levels of Range Index. It is not very encouraging.
When everyone hopes to effortlessly make money from an easy to rationalize target, there are bound to be disappointments. AAPL has been a profitable investment for many who were willing to follow the crowd – at least for a while.
What Figure 3 shows is that even over two decades where the bulk of expectations by professional investors are involved, the most dramatic price changes (losses) occur not out at the extremes of valuation but at its most common points – RIs in the mid-30s. And, there they have been strongly negative.
The current outlook
Figure 4 provides our conventional Block Trader Forecast review of the past 6 months trend of MM daily price range forecasts.
This is NOT a conventional technical analyst’s « chart » of past price ranges. It is a history of the forward-looking forecasts of coming ranges of price likely in the next few weeks and months. With the forecast being revised daily. Each vertical line of forecast price range is split into upside and downside prospects by the heavy dot of the stock’s closing price on the day the forecast was made.
While MMs see a possibility of price recovery continuing to the area of $195, a +12% further gain from $174, AAPL’s odds of presenting a profitable holding over the next 3 months are 64 out of 100. That is worse than one out of every 3 buys losing your capital. Not good, not competitive with better investment choices.
Further, the average price gain following forecasts at a Range Index level of 32 has averaged only +1.6%, not the +12.2 % envisioned. And, those positions would have been held over 10 weeks, or 52 market days, depressing the CAGR reward rate to only +8%.
That puts AAPL into a 41st echelon in our current-day ranking, not an enviable holding. For comparison, Figure 5 displays the prospects for the top 20 issues in today’s ordering. In respect of subscribers’ fees paid, the actual identities of the securities listed have been redacted. But several real examples of superior prospect are present.
Today’s best 20 issues have prior forecast payoffs of +9.2%, achieved in 37 market days, 7-8 calendar weeks, at a +92% CAGR. Their wins have been net of only 1 out of 8 losses. AAPL, on the other hand, with a Win Odds of only 64 out of 100, is regularly booking losses of about 3 out of each 8.
Apple may continue its gradual recovery of its stock price losses in the 3rd and 4th quarters of 2018. But Market-Maker estimates of their coming price changes are sufficiently iffy to urge investors in need of capital gains to consider alternatives. Many high-quality alternatives are present which offer better prospects in size of payoffs and in likelihood of being achieved. Articles are in preparation which will suggest specific investment alternatives.
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.
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 the SA blog of my name. First months of 2019 to date have produced over 800 hundred profitable position closeouts.