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Are Market-Makers [MMs] never wrong?
No, they’re humans like the rest of us. They must make decisions about the future under the same uncertainty facing all investors. But they improve their odds for success two key ways:
- They have tens of thousands of world-wide observer-informers keeping them alert to the changing, inter-related, competitive circumstances, and hundreds of experienced, skilled analysts constantly evaluating that stream of information.
- They buy price-change insurance to protect their capital put at risk in making the bets required to win profits.
Those odds for success are evidenced in the outcomes of the forecasts defined by the hedging deals specifically structured to provide the risk-insurance on each bet. In the case of Direxion Daily S&P Biotech Bull 3x Shares ETF (LABU), at these prices and forecasts the bets have been won some 9 times out of ten, in scores of real-market experiences.
Wins of over +20%, gained in average holding periods of less than 6 weeks. Yes, more than ½% a day, 62 basis points per calendar day, 57 times in the past 5 years. Leverage (in the structure of the ETF, not margin leverage) of 3x will do that.
It will when the bets are made at the right time. At the wrong times, the hurts will be equally painful. That’s why the Odds are so important. You need to know when to bet.
For Biotech ETFs this can be the time
And you can know, if you know what the MMs are thinking now. Here is a picture of what they have thought, daily over the past 6 months, was likely to happen to LABU’s range of possible coming prices in the next few months.
Figure 1
(Note: All materials from blockdesk.com have been approved to appear in this article)
This is NOT a conventional “technician’s stock chart” plotting past-prices. It is a history of future-price expectations derived daily where their vertical-line range of possibilities usually surrounds the then-current closing market quote on the day the forecast was made.
Today’s MM forecast of likely coming prices spans the range of from a low of $52 to a high of $67+. Its current price of $54.48 could rise by +23.6% in the next few months. Or it could sag lower. The MMs have protected themselves to $52, and have many “plan b” quick remedies available if needed beyond there. Since they are constantly alert and present in the evolving markets, this is a style of operation which can work well for them.
The individual investor is usually not as well positioned to the markets and may need to tolerate more trying interim experiences. In the row of data between the two blue pictures of Figure 1 the Drawdown Exposure item tells what the average of worst-case experiences has been for LABU. Experiences in the holding periods of the 57 prior forecasts of the past 5 years having upside to downside forecasts like today’s.
A bet on LABU is not a trivial matter where fortitude is involved. The investor could encounter a point in time where a sixth or more of his/her capital has possibly disappeared. Is the potential payoff worth that discomfort?
The answer must be a personal judgment as to investing practice and style.
Risk is the price of return in equity investing. Good risks can be undertaken when the odds of their being paid is infrequent, the inverse of winning odds. In this proposition the (for many observers) horrifying potential for an investment loss this large must be offset by very attractive win odds.
Here the experience has been full recovery of large price draw-downs 89% of the time, with a loss actually taken about one time out of every ten. And that loss reduced the payoff from what is now being seen as a +23.6% gain to an average of +22.4%, an overall loss of little more than -1%.
How real has the experience been?
In November of last year we published an article here on Seeking Alpha reviewing half a dozen biotech-oriented ETFs, including LABU as the favored choice at a then price of $45.46. Its forecast high was $60.10, an upside of +32%. Prior experiences following forecasts similar to what was seen at that time were also 9 out of 10 winners, in 7 to 8 week holding periods.
We daily monitor the implied price range forecasts of MMs for over 2,500 stocks and ETFs. The outputs are credible in over 1,500 of them, and the 20 best-odds bets are listed in our Market-Maker Intelligence List for subscribers. Sometimes LABU is one of the 20.
That was the case with LABU in the month following the above-mentioned article. Its outcome is contained in Figure 2, a partial segment of our score-keeping process for the Top20 MM Lists. It shows the day (February 27) when LABU reached its sell target of $60.10, the same price objective of the SA article.
Figure 2
Source: internal to blockdesk.com
This day’s Top20 position closeout activity is a combination of several forecasts reaching their target sell prices, along with LABU. Biotech stocks are numerous performers on that day. Dates of their forecasts on the MM Intelligence list are in the first column. Repeat opportunities in some issues [IONS] are not uncommon.
Figure 2 provides a further insight into the frequent results from our portfolio management discipline, TERMD. It uses the MM price range upper extreme as a sell-price target, and 3 calendar months (91 days) as a holding period limit when the target price has not yet been reached.
On this day there were 23 position closeouts, 17 targets achieved or exceeded and 6 holding period limits reached. Two of the holding period limits were at prices above their entry costs (closing price the day after the forecast) and four were below that cost, incurring losses. The ratio of wins to losses this day was a bit above the average win proportion of 70 to 75%.
The columns showing speed of closeouts is important to understand the compounding effect on rates of reward which is denied by a “long-term buy & hold” investment strategy.
Those positions closed out after a 91-day hold are merely reinvested at a conventional 364- or 5-day year rate. Depending what the subject of the reinvestment offers, they may have no time leverage other than what a four-instance-a-year trip provides.
But quicker target-achievers could easily double the annual frequency of reinvestment. Reinvestment of an expanded capital.
Using the financial community’s standard of measurement, the basis point (1/100th of a percent) per day, the RJF close result on 2/27/19 from the 1/9/19 forecast produced a 9½% gain in 49 days of investment, or 19.4 bp/day. Sustained for a year that is a +100% CAGR.
Many of the day’s closeouts produced multiples of those gain rates. Two of the loss positions, FLOW and MATX incurred fairly trivial capital damage, at single-digit bps/day, when the bps are multiplied by the days held.
But realistic expectations of investment gains must contemplate that not all efforts will close without costs. Any strategy which pretends to avoid actual capital losses will inevitably be incurring significant time losses, time required for fluctuating investment prices to recover from decline periods while being held. For the astute Active Investor, time is precious and productive.
Active Investment strategies, like TERMD, when used with not-(publicly and freely) available insights from the Market-Making community, can provide profitable productive guidance as to good and poor times to have specific equity investment holdings.
Update of the November Biotech ETF Review
Figure 3 brings up to current the near-term price range expectations of MMs shown in our earlier Biotech ETFs review. Once again, LABU is a superior competitor.
Figure 3
Source: blockdesk.com
Here are data rows from Block Trader Forecast displays for the previously reviewed article on Biotech ETFs like those seen in our Figure 1 for LABU. The right-hand column [S] indicates the number of SA readers requesting updates on articles covering these securities.
The extensive interests in IBB and XBI at present are at a price level not conducive to additional investment, but should not be disturbing to more passive investors with investment horizons beyond the next several months.
A comparison with SPDR S&P 500 ETF (SPY) shows the enormous gain potential difference in column [R] basis points per day for LABU and UBIO, but at a considerable offset in terms of price drawdown possible exposure [F]. Other best-odds top 20 issues offer attractive upsides [E] and bp/day [R] resulting from strong Win Odds [H].
Conclusion
Once again Direxion Daily S&P Biotech Bull 3x Shares ETF LABU is at a superior price prospect for capital gain in the next few weeks/months. Investors with a primary mission of building capital wealth as rapidly as is suitable should consider LABU as a portfolio participant.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position 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: 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 800 hundred profitable position closeouts.
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