I sold some calls today. The buyer seems to have done a very professional job by shorting the underlying stock over ~40 minutes after buying the calls. They locked in a $0.05 / share profit if they take delivery, or they may make more if the stock falls below the strike price prior to Friday at options expiration.
The buyer is positioned to ride this position out until expiration.
We both still have the option (pun intended) to close out the position before expiration. If we do, I get to keep my shares. The call buyer would receive premium, then cover their short by buying back stock.
I am writing this up because I have made the same trade three times in the past few days. The first two times I think the call buyer was either retail, or not professional. They held a naked call position, and bought back my calls at a very low price, right around market close. I even saw a comment in StockTwits that said something like 'darn it, my calls are getting killed.'
This last time, the calls retained their value such that if I wanted to, I could buy a bunch of stock, sell more calls, and if they take delivery I lock in around $0.05 / share profit.
If you want to better understand this, please give me a call.
Maybe we could set up a consultation for $250 and I will walk you through the trade. I am not keeping this trade data stored on my systems, so I would show you where to find the data.
I am Jeffrey Cohen, and after reviewing the model run for this weekend I see a few things that I would like to share about this market. Our money is tied up (voluntarily), so we are not investing on Monday morning, so we might as well share some insight. Maybe we attract a few new clients.
If interested, just give us a call or email from the Home/Contacts page here.
1) Actual market volatility is a tiny bit higher tonight after falling for months. Could be a one-off. We hypothesize an inverse relationship between price change variance and stock prices. If this becomes a trend, then new investments will require a higher expected return (a.k.a. lower prices).
2) The same stocks keep showing up at the top of our Chicago Quantum Net Score. Lately, they seem to be extra correlated to the S&P 500 equity index ETF SPY. We see this in elevated BETA values.
3) Elevated BETA values are where it is at in our model run. Not all high-beta stocks make the cut (some score quite low and are shorts/sells), but pretty much all of the top 20 model picks have high BETA values (greater than 3.0). So, high BETA does not make a stock attractive, but all attractive stocks in our model have high BETA values.
4) We are asking ourselves if the movement at the top of our model is intentional. Are these stocks being slammed higher and lower with the SPY, but always with the closing price coming back up or down so the variance and 'price shock' is less than it could be. We see that with one of our holdings, $SKLZ Skillz Inc., which is also a top 5 Chicago Quantum Net Score stock. It goes up and down massively intra-day, but usually closes off the high and low of the day.
5) The Chicago Quantum Net Score model has informed most of our current portfolio, and it is doing quite well for us. In addition, the rest of the top CQNS long individual stocks are also quite active, and rise and fall with true conviction. There are moves in these names that bless the savvy day trader.
6) Not to name names, but we do see a new stock (eCommerce in a way) towards the top of our list. the price is quite low, but that does not mean it is inexpensive, only that it has a share price under $1.00. The stock is QRTEA Qurate Retail Inc., and is representative of what we are seeing at the top of our model. Lower market capitalization stocks with high (and often increasing) BETA values that have been moving with the market but with less volatility than other high BETA stocks.
In conclusion, we see a tiny dark cloud on the horizon in increased actual price volatility, and we see a significant number of high risk stocks camping out in the list of 'best' CQNS long stocks. Buyer beware, and do your due diligence.
Our interpretation of statements made by Federal Reserve Bank Chairman Jerome Powell:
The Fed is not relying on private actions:
Tighter financial conditions driven by private action would need to be persistent and material, and independent of Fed / global central bank actions.
We wrote an article in Medium sharing all of the categories of U.S. economic personal consumption that declined in September 2023, from the previous month, on an annualized basis. The results will surprise you.
Here is the summary from that article:
Our key take away from this lengthy list of goods and services that declined in the past month is that the U.S. consumer is cutting back where it can to save money. It is eating less animal products, consuming less recreation and entertainment, and letting their homes fall into disrepair. The U.S. consumer is gambling and playing less, giving less to charity, spending less on household and personal services (less personal grooming), and has slowed spending on new cars and trucks. We also noticed a big decline in video and audio streaming services (think Netflix and Spotify), and in the use of childcare and educational services.
There are other goods and services categories in significant decline that continue to fall, such as landline phones, the use of stationary for writing, and television services.
Of surprise to us was that electricity usage declined, along gasoline and fuel oils. Normally, this frees up spending capacity to be spent elsewhere.
In our opinion, this is a sign of weakness in the U.S. economy.
If you dig into the article, you will see certain line item of interest for stock investors. For example, haircuts are down, so European Wax Center is probably going to see declining revenues, and a falling stock price. Gambling revenue is down slightly, so there goes Las Vegas.
Use the information as part of your investment research. Good luck.
Stocks that we run in our model (subject to data validation) fell 2% yesterday, or $900,000,000,000.
$900 billion in lost market U.S. stock market capitalization.
There are 14% fewer U.S. listed stocks (common stocks) than there were on May 5th (that pass data validation). Bearish
Stock market 'actual or historic' volatility is down for the year. Down significantly, as in 40% or 50% on a comparable basis. VERY BULLISH
The market at open (first 3 minutes) is rolling back yesterday's movements a little bit.
We did elect a new U.S. House of Representatives Speaker of the House. Mike Johnson, Republican from Louisiana, a conservative and relatively new member of Congress. A breath of fresh air, and he passed with unanimous consent of Republicans.
US GDP grew 4.9% in Q3. The U.S. economy is fine.
Good morning. It is pre-market after a down day yesterday.
However, there are signs pointing to investors benefitting from a more RISK-OFF posture in the short term. Why? We saw a few Top Drivers yesterday, but it is about the stock price action sensed in our model.
We will be making a video today as we pull the story together. Here are quick thoughts:
1. Expected return to risk is down as indices show smaller, or even negative YoY performance.
2. The lower expected returns, lead to smaller CQNS scores, which indicates either less confidence or less alpha or edge in the optimized long portfolios.
3. The S&P 500 Equity Index ETF, SPY, is our benchmark. It has started moving back up the charts, from around the 210th best individual stock to around 150 today. That is a big move, and indicates indexing and safety in turbulent times.
4. The rise of the small cap stocks at the top of our list. The top 50 stocks all have a market cap of $41B or less, and some significantly less (less than $100M). Yes, small caps have been a poor performer in the past year, with the Russell 2000 Index ETF down almost 4% this past year. However, the stocks at the top of the list have been falling and by definition, their valuations are lower. For example, Rackspace Technology, RXT, has a market valuation of $262M. Lower valuations make stocks look attractive by raising their expected returns, especially if and when their fundamental performance improves.
On a personal note, we closed a key short in our portfolio two days ago, and regret that decision. To get back in today would require chasing a stock, as opposed to moving into a setup and waiting. We are not sure what we will do today in the markets.
We have more work to do this morning. TTYL.
The U.S. stock market today was feeling blue (actually red) in pre-market. The key metrics people watch were all pointing to a down day.
The key metrics we tweeted about this morning were interest rates, the VIX, and the U.S. Dollar against major trading partners, and they were all significantly negative for stock prices.
It is now four hours after the markets opened, and the markets are positive and bullish on strong economic news about U.S. consumer spending.
We still see longer-term interest rates higher, such as the U.S. 10-year Treasury Note, up a significant 12 basis points and the rate is over 4.83%.
Bitcoin is up again today, up over 1%, and maybe this is driving some of the market strength.
Finally, on a refreshing note, the US stock market yesterday went up 1% (actual market cap of all stocks that pass our data validation), as did the U.S. equity indices. Those tied out in a very strong day yesterday. Today is more flat.
This is an options expiration week for single stock options, so some of the action might be around those.
Good luck to all. Stay safe.
We have been refining our 'top drivers of the U.S. stock market' list and spreadsheet. It is very much a work in process, we have two versions, and the data is delayed and not normalized.
However, it tells a story of lower asset prices, higher U.S. interest rates, a stronger U.S. Dollar, weaker U.S. consumers, and fear.
Unless something happens, all the 'supporting data' suggests downward pressure on U.S. equities.
Good luck to all.
Good morning U.S. stock market enthusiasts!
The historic volatility for all of the stocks that made it into our model rose yesterday for the first time in quite a while. It is a small, typical sized daily change (not an amplitude anomaly, but a directional anomaly).
What does that mean technically?
It means that yesterday, and for the past year, stocks had more price movement. They have a higher variance in daily price changes.
What does that mean for investors?
It depends if this signals a new trend of rising volatility.
If we see higher variance, then we see more risk and lower expected stock market returns for the next year. Hell hath no fury like unanticipated change.
If variance is at a new level and starts to rise and fall, then we wait and see. It takes coal off the fire of new risky stock demand.
If variance starts to rise and yesterday's reading is the low point, or trough of the variance readings, then avoid risky stocks. You can put money into risk-free assets earning 5% or more, or start looking at profitable, low risk stocks. Maybe this is when low-variance stocks might have an edge (we publish those too). An analogy for price variance hitting a trough...it is like when the Fed FOMC stops lowering interest rates and raises them for the first time. It is a tipping point in the market.
We will continue to report on this.
Highland Park, Illinois
Registered Investment Advisor
This is not investment advice.
By Jeffrey Cohen
We are changing the way we think about future expected returns. This is currently a mechanistic way to calculate expected returns to risk assets based on academically rigorous methods dating as far back as the 1950s. Today, we are working on some new ideas.
We start with the idea, mock up a spreadsheet, then figure out how to codify it into our model automatically.
We are also looking at a pair of significant modification:
- what data should we be gathering and outputting on each stock?
- should we market capitalization weight the model?
If you would like to get involved in our efforts, we will 'return the favor' by providing you with one or a few CQNS daily runs.
Best way to reach out is phone or email on the 'home' page of this website, or via Twitter direct message, here.
We produced a livestream youtube video of the company and stock Skillz $SKLZ. Hope you enjoy it and find it insightful.
Towards the end of the video we document our key findings in 15 points:
Skillz: Top 10 list:
1. The stock losses over the past month appear to be from low-volume selling, and not really from trading. The day’s lows don’t recover. IMO: this is just selling. Could be just shorting too?
2. The company trades at 1/3 of the book value. $84M equity market capitalization vs. ~$250M book value.
3. CEO made a statement about Q2 2023 objectives, and we are on track to achieve them. There is evidence.
4. More new games. Bolero, NFL, and others. Not that many reviews per game. Could new games mean more revenue.
5. AARKI (consulting firm) is getting new investment and 20% shares in their performance plan. Should help rebuild that business, which is helping developers navigate the new Google Privacy Sandbox method.
6. This stock keeps falling, down from $250/share to $4/share since December 2021.
7. A lot of short interest, maybe up to 2M shares out of 17.0M shares not owned by the CEO.
8. In the past few days, there has been significant short selling (short volume > 50% for the past 10 days). 74% and 62% in the past 2 days (very short).
9. In Stocktwits, this symbol has extreme fear (bearish) and extremely high message volume (loud).
10. (New feature) Daily challenges in a game does boost engagement. We know this from Monster Hunter Now. SSO, Enhanced Chat and other features are needed too. Integrated with Unity Engine.
11. We just bought 1000 shares: 12:44:41 $3.9894 on the video. It did not move the stock price at all.
12. There seems to be only one institutional investor: Wildcat Capital Management, LLC with ~19.5M shares (although they recently sold ~2M). Also, CEO owns about 4M of the 21M shares (and 100% of the Class B with extra voting rights). ARK and BlackRock used to own it, but not any more. Some small ETFs own it.
13. SKILLZ has many job openings in Las Vegas. Many leadership roles in engineering, accounting, operations and product development. 32 in Vegas, 15 in SFO, and 4 technical roles in Seattle.
14. Good cash management: Prudent stewards of capital. Jason Roswig, President and CFO, added, “Our prudent management of the business resulted in a quarterly cash burn rate in Q2 of approximately $14.6 million with our June 30 cash position (including marketable securities) of approximately $361.4 million. As a result, we have the flexibility to invest in new product features for our platform that will drive increased scale in our business and attractive top-line and cash flow growth. At the same time, our solid balance sheet and capital structure provides us with significant optionality to deploy resources to enhance shareholder value. In this regard, during the second quarter, we opportunistically re-purchased $159.8 million in outstanding debt at a discount resulting in total debt as of June 30, 2023 of $129.7 million.”
15. User Acquisition Spend (marketing) is getting more effective. They are targeting a 6-month payback period, down from ~11 months today (Q2 earnings call).
We also made notable progress throughout the second quarter in continuing to improve user acquisition spend and are confident we are on track towards achieving our optimized goal of a six-month payback period.”
One of the fundamental tenets of our Chicago Quantum Net Score model, and our portfolio management and investment theory, is that investors prefer less risk.
Investors see risk (historical or expected price volatility) as a cost of holding an asset. This is similar to the cost of interest rates you could earn if you invested in risk-free assets.
Investors are willing to trade expected future returns to reduce risk. We see this in the higher valuations for companies that earn a profit, and especially those which also have low/no debt leverage.
So, when we see stock price volatility continuing to fall in our equally weighted portfolios, we think that the demand for U.S. equities has a quiet support. This may be why stocks have not fallen further, or it could support a next price movement higher.
Our run from last night, using data for one year through October 4, 2023, shows that price volatility is down again, and continues to fall.
Last week we watched the large-cap stocks sell off. They recovered yesterday (as evidenced by strength in $QQQ), but today they are selling off again.
To be specific, if we only look at +/- 5% today stocks, above $10B in market capitalization (thank you Finviz), then we see the large growth stocks (e.g., tech) are down, and the more conservative stocks (e.g., pharma) are up. Large stocks have liquidity to enable large positions to change without significant price distortion, so we would look to them first for money flow estimates.
The one stand-out exception is $NVDA which is up 0.7% today.
As we step back, the market is showing choppiness (up and down with little direction). A little more down than up, which is understandable since interest rates are rising (and this lowers equity valuations). We look to the large capitalization stocks to assess money flow on a daily basis.
One of our proprietary metrics is to look at total U.S. listed stock market capitalization for the stocks that pass our data validation. Tuesday's market fell and Wednesday's market rose, and anecdotally we saw this initially in the large cap stocks.
At some point when the valuations move enough, we would expect to see a wealth effect. Current equity valuations are around $50T (+/- $5T).
What does this mean for you? Let me know in the comment section below.
In case you were wondering, yesterday was a significant recovery in stock market valuations.
We noticed the large-cap stocks were broadly higher, especially in the most risky parts of the economy.
The fluctuations in stock market valuations are up the past two days ($1.7T and $1.3T). Buckle up. We don't think this is good for equities in the near-term.
By Jeffrey Cohen
One small tidbit of analysis in our model is to look at the total market capitalization of all the stocks that pass data validation each day. Today, 2,992 stocks made the cut, down 3 from the day before and down 28 from 2 weeks ago as some stocks must have delisted or seen low/no volume.
The total market capitalization of stocks at market close on October 3, 2023 is $47.7 Trillion. The market capitalization on October 2, 2023 was $49.3 Trillion. Yesterday the total value of our relevant stock universe $1.6 Trillion.
$49.3127T (market cap Oct 2 close)
$47.661T (market cap Oct 3 close)
-$1.6517T (the difference a day makes)
-0.03349% (percentage difference).
We have noticed that the main US equity exchanges don't show the same size movements.
SPY down 1.34%
QQQ down 1.75%
IWM down 1.68%
This feels very important to us. The typical stock investor lost 3.35% yesterday, and the margin calls may start coming. However, the index holders are sitting safer and more secure with smaller losses. This is usually thought to be due to the power of market capitalization weighting of stock portfolios, but it could just as well be due to the lack of coverage of most stocks. The most popular, profitable and followed stocks just do better than the rest (our hypothesis).
We did run an analysis a months or so ago that showed that only investing in profitable stocks with low debt ratios avoided the edge over the S&P 500 equity index ETF, SPY, so maybe the biggest losers yesterday were in money losing companies most exposed to debt servicing costs. Time will tell.
We also look at the annual change in the stock price, adjusted for dividends, for the three major U.S. Equity Indices for the past year, and the risk-free rate of return we use for our model (typically the 3-month or 6-month US Treasury bill yield).
Riskfree rate = 5.62%
Actual SPY return = 17.14%
Use actual S&P500 rate = 17.14%
Actual IWM return = 4.05%
Use floor Russell 2000 rate = 6.00%
Actual QQQ return = 29.92%
Use ceiling NASDAQ 100 rate = 20.00%
Expected market return = 8.76%
The way you figure out the expected total return is to add up the riskfree rate and the expected market return to risk, and this comes out to 14.38% for the next year.
So, while you drink your morning coffee and get ready to start your day, think about how the totality of stocks is now worth 3.35% less than it was yesterday.
Source: Market capitalization data is provided by Intrinio, a professional market data services firm which we access using Python.
By Jeffrey Cohen
We have a two and three-stock long portfolio selected by the Chicago Quantum Net Score today that scores better than the top stock in our model individually. The edge is significant over the SPY. These stocks have been on a tear higher lately.
They were up yesterday, and they are up pre-market today.
What do we know about them?
The first company offers buy now, pay later and personal consumer loans at point of purchase.
The second company is an emerging biotech stock that looks alot like Corbus Pharmaceuticals, and is working oncology cures for solid tumors.
The third company offers an eCommerce platform for residential real estate transactions.
The fourth stock that did not quite make the list is a bank to consumer digital advertising platform.
The fifth stock that did not quite make the list is a seller of used cars that also holds loans made to consumers on the cars they purchase.
This overall portfolio is highly exposed to credit delinquency and interest rates, and relies on consumers to keep spending and borrowing, while staying current on their loans.
It also has a micro-cap biotech company that likely has been 'tape painted' or laddered lately to keep the risk-reward balance optimal. We saw this in the past with AeroCentury (ACY), which was a closely held company out of China which showed a good technical rating even into bankruptcy.
Buying all five stocks instead of just two removes about 10% of the edge of the portfolio.
We observe a few key characteristics.
The top stocks to short (or sell, or avoid) are almost entirely below $250mm in market capitalization, and a majority of them have declined 50% or more over the past year vs. their average closing price. These have already fallen significantly. These are falling knives.
A full third of the stocks to buy and hold individually have also fallen 50% or more in the past year. Good bargains or stocks going to zero? Not sure, this is where due diligence comes in.
Volume in the 3001 stocks that made it past data validation today is 101.8% of the average volume for these stocks over the past year (we did an average). It is tricky that on a day when the market rose, the volume was not higher.
The average dividend yield for the 3,001 stocks was 1.73%.
The average BETA of all 3,001 stocks was 1.175, or 17.5% higher than the S&P 500. This is likely indicative of the benefit of holding a synthetic, passive index that is market capitalization weighted. It reduces risk, as it is harder to move the price of large stocks.
If the 'best' stocks in our model are the most risky, and reflect a bet on the health of the lower-end consumer (buyer of used cars, direct selling homes, and borrowing to buy on eBay or Amazon), then this market is pushing risk to the extreme. There is profit opportunity in the short term, but it is super-sensitive to macroeconomic performance. The Chicago Quantum Net Score picks for September 29, 2023 are a bet on the success of the US economy.
Good luck to everyone. Good luck to all.
Catch our video this morning on Youtube, here.
By Jeffrey Cohen
Today, the market reversed course and stopped declining. In addition, we saw evidence of short squeezes and higher-risk stocks advance.
We saw this last night in our model run. It suggested the same types of risky, new economy stocks with much higher conviction. The model ran with almost 40 'ticks' of edge or alpha over the S&P 500 Equity Index ETF (SPY).
We also saw the base, underlying metrics for our top factors change during the day to support the shift. It isn't supposed to work this way, or is it? Market directions shift, underlying factors move sympathetically, then by the end of the day the equity indices have moderated their gains, faded their runs, and the day ends having even lower volatility than it did.
Time for a video to work through the details. Please check our youtube channel.
Good morning, this is Jeffrey Cohen, President of US Advanced Computing Infrastructure, Inc.
The top stocks in our model have a larger edge than they did a few days ago. The edge is significantly higher.
Why? Let's look at the details:
1. The best stocks in our model have a better CQNS score. This is driven by either higher expected returns, higher relative returns, and/or lower variance. What we see is lower all-stock variance for a portfolio of 3,010 stocks held evenly. This is the lowest variance we have seen, likely ever, at a level of 4.0 x 10-5. This is based on a power log (base 10) for the prior 253 trading days. If the 'best' long stocks have better scores, then portfolios (of multiple stocks) are currently better too.
2. The risk-free rate of return is higher by 0.002, so not very much, as the short-rates we use to set this are largely unchanged. You likely noticed the 10-year US Treasury yield up to 4.5%, but the shorter-term debt (1-month to 6-months) is largely unchanged. The market expected return to risk is up to 8.40% based on recent gains in the US equity indices. Expected future market returns are up to 15.65% over the next year.
3. The model is picking from 5 to 7 stocks in the long portfolio. This is consistent over the past few weeks, as there is advantage of finding stocks that zig and zag together, lowering overall portfolio risk.
4. The edge is higher. We see 31 ticks of edge or alpha over the $SPY S&P 500 Equity Index ETF.
This does not mean you will make money by holding the long portfolio because the overall market may fall. However, you would have a better risk-return positioning than holding the $SPY. We suggest you hedge the risk of the overall market with either the equity index, or using the 'worst 3' short positions our model suggests. This is how we manage our CQNS portfolio for clients.
We shared our Chicago Quantum Net Score long picks for the day. The edge is lower.
Good morning, this is Jeffrey Cohen.
Five Fast Facts:
1. Our quantitative model is less positive, less aggressive, and less attractive for holding stocks. The best, most controlled, lowest risk and highest expected return stocks just blew out their correlation. It was like the 'players club' that holds these top stocks (think ARKK) blinked.
This reduced the edge, or alpha on our optimized long portfolio from 28 'ticks' to 18 'ticks.' This was not due to big picture changes. Expected returns, price volatility, and all the other metrics are relatively unchanged, yet the edge is lower. So, the best stocks are less good.
2. The 10-year US Treasury Note yield is up significantly, and although it is down three basis points this morning, it is still up significantly, at an 'investing cycle' high. Short rates have not changed.
3. Pre-market is broadly higher. We track portfolios. We create them, liquidate them, and recreate new ones. Today, pre-market, growth is up, bonds and banks are up, steel, mining and autos are up, energy is up. It seems universal, with only a handful of stocks lower in pre-market.
4. Our Chicago Quantum Net Score picks are similar to the ones we picked yesterday, but there are some smaller portfolios reaching the top of the list. Best portfolios of 17 to 18 ticks of alpha have between two and eight stocks. So, the best are in the same place, but there is less confidence.
5. Large cap stocks have been down for days.
This is what we are thinking about. The largest capitalization stocks are doing the worst this week. Growth and innovation are down. Advertising is down. Confidence is large caps has slipped. Even Eli Lilly is down.
The best stocks this week? The low growth, slow growth stocks like health insurance are doing well. In a tough market, investors cycle into stable, safe companies that are insensitive to economic changes. We noticed that United Healthcare is up most days.
Stock Market BLOG
President and Investment Advisor Representative