Play the Players

We say yes, and here’s why.

We derive forecasts from the hedging actions of the block trading community on over 2,000 widely-held and actively-traded stocks, ADRs, and ETFs. The common denominators of upside and downside price move potentials are present in all of the forecasts. The uncertainty involved in each is indicated by combining the up and down.

Those common denominators let us aggregate expectation descriptors for the equity market as a whole, or for any subset of interest. To put the overall market in a picture many stock investors can relate to, we took the recent price history of the S&P500 index, and expanded it to embrace the daily average upside and downside expectations of our entire population.

What appears immediately is the way fears and hopes expand the range of expectations when the market is rapidly and substantially declining. Less obvious, but also present is the “What, me worry?” attitude of investors in rising markets. Then the range of uncertainty shrinks.

These effects are more apparent in the following picture:

In the 2008 May-July market decline downside concerns widened only a bit, while upside hopes stayed high. Those hopes were modestly rewarded by a market rally into September. But as declines began again the downside apprehensions expanded and then mushroomed into a panic, along with plunging prices.

The convictions of optimists are hard to kill off, fortunately, so upside potentials widened appropriately for many stocks, expanding that dimension’s average.

While the market stabilized as year-end approached, the downside fears subsided back to earlier levels. But more bad news lay ahead, and further market declines into early March of this year repeated prior investor responses. Still, they were not as extreme as before.

Nor were they in early July as a month’s worth of declining market index numbers tested investors’ convictions. Then downside expectations did not expand much, and the market rejoined the recovery path.

Now the question turns to can it continue? Is it “what, me worry?” time?

That attitude may have started to appear in early September when downside concerns greatly diminished. They were accompanied by reduced upside convictions, and the level of blue-line uncertainty dropped to a level not seen in over a year.

The following couple of weeks’ pullback shook off the complacency, and once more the raised levels of concern were less severe on the downside than previously. But so were the enthusiasms of the upside. Yet uncertainty remains in a healthy range.

Looking back at the first chart, the S&P500 index price continues to be accompanied by upward trending lows and solid to up-trending highs. Behavior of the lows is most encouraging. Our conclusion is that the overall recovery continues, showing no signs that investors are likely to precipitate a serious downturn, absent the introduction of some new momentous disruptive event.

That appears to be a direct parallel as block traders are hedging their at-risk positions when filling trades in SPY, the S&P 500 SPDR. Their current forecasts are for a range of $104 to $118, +8 ½% on the upside, and – 4 ½% on the downside.

Over the past five years 129 forecasts with similar upside to downside proportions, or better, have seen higher SPY prices in 2/3rds of the days of the following 3 months, averaging +16%, and lower prices in the other 1/3^rd, averaging -14%. Buy and 3-month hold gains outweighed losses 1.9 to 1. SPY now ranks better on a reward-to-risk scale than 74% of the 2,000+ issues we follow.

Peter Way Associates has no present investments in SPY.

Recent News Market Forecasts

The bears are on the prowl during this mid-vacation-season.

While the second team is in charge, trading volume of all stocks typically declines a bit. Yesterday it ran about 4.4 billion shares on the NYSE, AMEX, NASDAQ, and regional exchanges. ETF volume, on some days over 50% of the total, was down to 30%, at 1.3 billion shares.

The lower volume encourages some players to stick around during a time when their activity can have a more pronounced market effect. Trading of leveraged and short ETFs gives us a look at what they may be up to.

At yesterday’s prices, all ETFs traded over $58 billion, down from a prior 3-month daily average of $68 billion, a decline of -15%. Over 9/10^ths of the usual $68 billion is in 76 ETFs that normally trade over $100 million a day. Over 3/4^ths of the action is in two dozen ETFs that each trade over $ ½ billion daily.

Over $9 billion of trades were in inverse, or short-positioned ETFs, with less than $6 billion in leveraged long ETFs.

High rollers like the 3x action of the FAS (leveraged long) and the FAZ (levered short).

While trading in the FAS edged off less than ¼ of 1%, volume in the FAZ doubled.

FAS is trading near the middle of its past 52-week range, while FAZ is near its low.

A quick check of all the inverse, or short-position ETFs among the most actives shows that they too are trading near or at their lows.

They may not stay there when the first team returns.

Recent News ETF Investing, investment strategy

Starting today, Play the Players will have a different look and purpose.

Before, the blog was intended to explain why our philosophy and approach was what it is. We sought to inform, educate, and provide big-picture perspective. We will continue to do that in a separate blog channel set apart for that purpose. It will see periodic entries.

But now our primary blog activity will focus on items of more immediate impact, where timely attention may help you fatten up the P side of your P&L. There may be more than one a week, possibly even more than one in a day particularly well endowed with opportunity.

We will continue to have a particular focus on how professional investors and their organizations utilize Exchange Traded Funds (ETFs) to manage their risk exposures.

That will often involve looking closely at the evolving activities in ETFs that are built to go up when the prices of their holdings go down (inverse, or short ETFs) and the use of ETFs that have the price movement accentuation of leverage as a part of their internal architecture.

On top of all that, our everyday updates of the price range prospects for actively-traded ETFs will continue to provide opportunity for comment as changes occur. And the market thermometers showing the coming-weeks’ price range potentials for the four major market indexes will be present each day.

If you want to be a player, instead of finding yourself played with, check in here regularly.

Recent News ETF Investing, institutional insights