Money & Minds Move Markets; Sometimes Emotionally – Seeking Alpha

February 17, 2017

Where can we hide, perhaps even prosper?

The market “woods” are currently full of ominous warnings about high prices, overfull P/Es, political turmoil, end of the economy and ecology, and other “scientific” notions.

The typical quick “solution” to a fearful equity market environment is to own gold. It is expected to resist market panic, and may even rise in price from the buying of the fearful. Many prior examples are available for illustration. (Both for and against.)

Making equity price forecasts in “well-adjusted” emotional times is a difficult enough task; we are not interested in contributing to emotional entropy. But perhaps some perspective from a direction that few can (or will) provide may be a plus in your decision process.

Big dogs like big bones

A proportion to contemplate: The largest “equity” investment in gold, by far, is SPDR Gold Shares (NYSEARCA:GLD): $31 billion. The largest equity ETF is SPDR S&P500 ETF (NYSEARCA:SPY): $227 billion. The largest single equity investment is in Apple, Inc. (NASDAQ:AAPL): $710 billion, and Alphabet, Inc (NASDAQ:GOOG) is $574 billion.

A “jail-break” out of equities into gold has some severe proportional problems, so many professional money-managers see that kind of an adventure as far more risk undertaken than avoided.

But individual investors need to have some sense of what those tending the public markets are currently being asked to do, and how they respond while protecting themselves from what other market pros see as possible to occur – in the next 3+ months.

The cost, and benefits, of “market liquidity”

Today’s highly automated public markets serve individual investors well, with quick, easy, inexpensive transactions – as long as the shares and dollars involved come in smaller packages that will wait their turn if they want a price other than the immediate quote.

But that’s not practical for huge investment funds and organizations tending multi-billion-dollar portfolios. These days there are many such. They need to make adjustments to their portfolios in multi-million-dollar trades, all shares at one common price agreed to, and either “right now” (fill or kill) or within some pretty tight time constraints.

This is the important (very profitable) world serviced by the volume market-making (MM) community. In it thousands of such transactions a day are accomplished by providing temporary “market liquidity” to balance seller and buyer demands. The (largely) investment banking capital momentarily providing that transaction lubrication is at risk of undesired price changes unless somehow protected.

It gets protected (or liquidity is not available) by hedging deals in derivative contract securities which entice providers with suitable possible rewards for undertaking the risks. That process, negotiated in public (but very specialized) markets reveals what is regarded by its players to be the upper and lower limits of price on thousands of stocks and ETFs.

Here, in Figure 1, is how those price limits are seen for the Precious Metals stocks and ETFs as of the close last night by the actions of the volume market-making community.

Figure 1

(used with permission)

Prospective price rise possibility to the top of a forecast price range is shown on the green horizontal scale, and actually experienced worst-case price drawdowns from prior forecasts like today’s are shown on the vertical red scale. Intersections of the two are mapped by numbers identified by symbols in the blue field at right.

The dotted diagonal marks the watershed of equal opportunities between risk and reward.

As a reference point SPDR S&P500 ETF is at point [11]. SPDR Gold Shares ETF is at [9]. AEM, Agnico Eagle Mines, Ltd., a $10 billion market-cap Canadian mining company is at [10]. The iShares Silver Trust (NYSEARCA:SLV) at [14] is an under $6 billion market-cap ETF.

Figure 1 says that exceptional reward in these equities carries with it exceptional price risk. MM outlooks for SPY suggests that a ~5% price reward is available in the next few months at an encounter with only -3% price drawdowns. GLD roughly doubles both those rewards and risks.

A closer look at how GLD prices have behaved over the last 5 years is to be had in Figure 2.

Figure 2


This table looks at the MMs’ forecasts for GLD every market day in the past 5 years (1256 of them) and in the blue row of all forecasts reveals a consistent -7% per year trend of price changes in holding periods ranging from 1 week to 16 weeks (80 days).

Each row above the blue one reduces the #BUYS count by eliminating the forecasts with more even upside to downside results. The magenta row of 3 : 1 reward to risk (or more extreme) is where today’s MM forecast for GLD lies.

If making money by long investment in GLD is the desired outcome, it appears that finding a GLD forecast with upside of at least ten times the downside may be your best bet. In Figure 1, the green-background area is only 5 : 1.

For GLD, 184 out of 1256 forecasts of 10 : 1 occur about 15% of the time, and the 15 : 1 forecasts are only about a 3% of the time event – pretty scarce.

A bit more detailed perspective on GLD is in Figure 3.

Figure 3

(Used with permission)

This is NOT a typical “price chart” of past market prices. The vertical lines are daily records of MM price range forecasts of likely prices to be encountered over the next few coming months. Forecasts derived by the way that MMs at the time sought to protect their capital put at risk providing market liquidity.

In each vertical the heavy dot marks that day’s closing market quote. It splits the forecast range into upside and downside price change prospects. The split is measured by the Range Index – the proportion of the whole range lying below the market quote. Today’s GLD RI is 26, signifying about 3 times as much upside as down.

As seen in Figure 1, GLD has a +9% forecast upside against a -6% downside experience from prior forecasts with RIs of ~26. But those 253 such experiences recovered from their downsides in only 39% (about 100) of the experiences, leaving about a -1% loss on average.

So now, based on prior forecast experience, is not an advisable time to be buying GLD.

How about the other grey metal, silver?

In Figure 1 the iShares Silver Trust had higher risk than GLD, but offered higher price return prospects. Figure 4 provides the comparison with Figure 3.

Figure 4

(used with permission)

Yes, bigger upside of +15% involves larger (-9%) drawdown experiences. And not that much better Win Odds, with less than half the 542 prior forecasts recovering. The -1% achieved return is really no better than GLD.

Conclusion: Alternative choices

Every day in the year 2016 Peter Way Associates, thru, has been publishing for subscribers lists of market-makers’ Intelligence-ranked 20 stocks or ETFs with the best odds-on achieved payoff prospects. Year-to-date some 95% of the forecasts contained in the over 5000 identifications have come to fruition under a standard portfolio management discipline called TERMD.

The typical forecasts and historical supports have offered upsides and achievements of >+10%, in periods of ~ 2 months, producing strong double-digit CAGRs that are multiples of what would be earned in price changes by identically-timed entry and exit transactions in SPY.

Figure 5 pictures the capacity for wealth accumulation in those MM Intelligence lists. They are a far better choice for most individual investors than worrying about market crashes that have been a prevalent concern for months now.

Figure 5


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 their guidance what the arguably best-informed professional investors, revealed through their own self-protective hedging actions, 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, has further information.

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.

You Might Also Like