Investing Theme
It is smart to have big-money institutions long your holdings. They want to see those stocks' prices rise, the sooner the better. They have the money muscle to create that kind of environment, whether you own them or not, so why not?
When they buy the Market-Makers helping them have a sense of how far up the big-money clients are likely to push. Since the MM will usually have to "fill" their buy orders by shorting the difference in shares which can be rounded-up from willing sellers at today's bid price.
Don't worry for the MMs, they constantly have ways to cover shorts, but meanwhile we have their informed forecasts to compare with market outcomes of like hedges of the past 5 years where upside-to-downside expectations proportions are like those of now. Those are shown for Microsoft (MSFT), Apple (AAPL), Goldman Sachs (GS) and Visa (V) in this article.
But is this market at an extreme?
With comparable coming-price expectations for over 2800 stocks, ETFs, and Indexes we have a comprehensive view of the pros' view, backed up by real-money commitments. It is produced every day, so we have good records of when it gets to extremes. Figure 1 provides today's Market Profile frequency distribution of MM forecast Range Indexes along with times of overpriced and under-priced markets. A Range Index number is the percentage of the whole forecast range between the market close price and the forecast low.
Figure 1
Today's RI of 30 is midway between low markets with RIs averaging 20 or less and high markets averaging RIs of 40. Don't think of 50 as a norm: Would you buy a stock with as much downside price change risk as upside gain potential? And narrow distributions of forecasts suggest more index stability than times when forecasts of individual securities range widely across possible potential price changes.
What do you see now?
Where are the more promising stocks?
Promise is one thing, performance can be another. Quantity over quality may thrill some investors, but most look for risk restraint along with reward opportunity. You can't have one without the other. To find a balance we need to know what is being offered.
That is presented in Figure 2 for AAPL, MSFT, and their (present-day) Dow Jones stock buddies - at least as MMs (and their big-money clients) may be seeing them.
Figure 2
This map locates securities at the intersection of prospective price gains (green horizontal scale) and potential price drawdowns (red vertical scale) based on market-maker hedging behavior to protect their necessary endangerment of firm capital as they enable volume trades. Desirable conditions are down and to the right.
The "frontier" of best advantage runs from MCD at location [2] to MSFT at [6] and to BA at [22]. AAPL is at location [18], just above [16]. GS at [5] and V at [23] are to the left of 18.
While Figure 2's comparisons provide a perspective on many of this group's alternative investment candidates, several conditions contribute to reward and risk. A principal question for both are "how likely are these to happen", and "can their impact be improved?"
Figure 3 presents the MMs' price range forecasts for our two principal-interest investment candidates and their two close competitors, along with the histories of outcomes from their prior forecasts of the same proportions as today's.
This table presents data on those stocks most likely to produce satisfying RATES of capital gain under the portfolio management discipline known as TERMD.
That discipline seeks the largest, most likely, quickest to be captured net capital gains with the least interim exposure to price drawdown on the way to target reward attainment. The same discipline is applied in Figure 3 to the blue rows of market index ETF (SPY), our MM-forecast population 2800-securities aggregate, and its top-ranked 20 stocks or ETFs.
Figure 3
The gains and risks of Figure 2 are in Figure 3 columns of [E] and [F]. AAPL's +17.8% upside prospect from [D] $499 to [B] $588 compares with MSFT's upside potential of +18.2%. The risk exposures data of [F] draw from prior experiences rather than from current forecasts. Indeed, market circumstances often make current price risk forecasts an underestimation of what may ultimately occur. They may be more beneficial to the sellers of insurance than to the buyers.
[F] data could come from those prior forecasts (of the past 5 years) where the balance of upside-to-downside price extremes were like what is seen today in [G] of Figure 3. AAPL's Range Index [RI] of 31 indicates over 2/3 of its 34% price range [S] is to the upside, while about half of MSFT's 27% price uncertainty range lies in each (up and down) direction.
But instead, the [F] data is an average of the actual worst instance of interim price drawdown below the position's entry cost in each of the prior [L] forecasts like [G] during the [J] days the position was held. It measures the true price risks actually encountered at the hands of the relevant forecasts, not just of some prior calendar historic extreme.
The "proof" of the coming price "pudding" is suggested by what proportion of those [L] forecast outcomes wound up at a profit - shown as a % of 100 in [H]. This important dimension is used to weight the actual [ I ] payoffs realized as a ranking figure of merit (fom) when teamed up with a similar offset of [F] weighted by the complement of [H], or 100-H. That action takes place in [O] and [P] when combined in [Q].
While [Q] suggests a sense of scale, its calibration by the TIME required in [J] converts the scale into speed in [R]. The speed is stated in conventional financial-industry terms of "basis points per day" or bp/d. A basis point is 1/100ths of a percent, and in a calendar year of 365 days 19 bp/d sustained for a year doubles the capital invested. On the 252-day market year it takes 27.5 bp/md.
AAPL's bp/md of 31.5 is equal to a CAGR of +140%, and MSFT's 14.1 bp/md produces a CAGR of 48% where the AGR of CAGR is an annual growth rate of 365 days.
Figure 2's column [R] provides an inclusive "figure of merit" (fom) useful for preference-ranking of securities where capital-building is of importance in future expectations. The foms show how different are the prospects for AAPL and MSFT, compared to SPY, the SPDR S&P 500 Index TRUST ETF as a market-proxy.
When price-range forecasts from qualified appraisers are available on a large population of equity securities, as they are in our population of over 2800 MM forecasts, a further notion of opportunity norms is available. Many past-history "norms" of indexes like SPY exist, but very few are selective averages of forecasts like the +17.9% upside and -11.1% downside of this population.
Its principal limitation is that its forecast horizon is limited to the legal lives of the derivative contracts used to imply the range of coming prices. That horizon typically is limited to a few months. The TERMD risk-management discipline referred to earlier sets a time-investment cut-off at 3 months.
The figure of merit [R] ranking has a multi-year daily history of capital-gain (and loss) outcomes for the best odds-on outlooks in the MM forecast population. The top20 bottom blue-row of Figure 3 provides a typical contrast with the row-above population.
The top20 now shows an upside price-change prospect of some +15.3% gain potential, less than the population's +17.9%. But its price-change risk outlook is so much lower: only -7.4% compared to -11%. The payoff appears in [ I ] where gains of +14% have been achieved from top20 prior forecasts, compared to the populations' mere +3.1%.
Higher-risk experiences are the population culprit. Only 6 out of every 10 population forecasts have been [H] winners (profitable under TERMD discipline) compared to 7 out of every 8 of the top20's. Time investments also "contribute" to the population's worst losses, turning an overall average gain into a fom net loss, one worse than had by SPY.
The top20's smaller time investment of 35-day holding periods boosts its bp/d fom score to better than 33, above either AAPL or MSFT. Compounding time-investment efficiency with realized payoffs is very powerful, producing triple-digit CAGRS quite frequently.
Comparisons
The article's purpose of examining a logical preference today between AAPL and MSFT puts AAPL out front in that contest on several fronts. But a less-discussed one may be best not overlooked, the Realized Payoff [ I ] difference. AAPL has captured 11.4% of its [E] 17.8% upside, a [N] Credibility Ratio of .64, compared to MSFT's .47 capture of only 8.6% of its +18.2% [E] upside.
To have a visual comparison of these two stocks' RI histories, please regard Figures 4 and 5.
Figure 4
The vertical lines are the price range forecasts implied by Market-Maker hedging actions. The heavy dots are market close quotes on the date of the forecast. They split each forecast price range into upside and downside prospects.
Figure 5
The Win Odds of both AAPL and MSFT are a high profitability of 9 out of every 10 or 90 of 100, and are from Sample-size experiences of over 100 prior forecasts, each. That puts the CAGR [K] annual payoff rate of +140% for AAPL into dominance of +48% for MSFT.
Conclusion
Extensive comparisons make Apple, Inc. a better choice at present prices and prospects for stock near-term capital gain than Microsoft Corporation or other Dow-Jones stocks.
