April 21: CQNS DOWN Run Findings

Jeffrey Cohen, Investment Advisor Representative

We ran our CQNS UP and DOWN runs tonight.  DOWN run goes faster (less deep optimization required) so taking a break to share some results.  If you bought this run, then you would be getting a management report with all the results and insights we could muster.

The three major US equity indices we use in setting expected market returns (for next year) and doing very badly (ex. div).  The S&P 500 has faltered.  SPY is up 6.67% (respectable, but down from expectations).  The Russell 2000 IWM fell off the truck, down 10.43%.  I can tell you how this feels, because I hold three small cap stocks.  They are down too. According to the DOW Theory, small caps do the worst in a downturn, or liquidity event, because people are worried about getting any money for their stocks. Large caps are the safest, especially those with earnings and operating cash flows. Growth stocks with no earnings, but large market caps, come next, then the small caps.

So, the NASDAQ Composite 100 is down 1.04% this past year.  That is not good...as these are technology or growth stocks and this shows how little innovation is worth this past year.  

All in all, our market expected return is 4.56%.  In a market like this, you either buy value stocks (you don't mind waiting since the price is so good), or you buy reduced volatility holdings.  This way, you are more likely go get your 4.56% with less risk, and maybe an unexpected capital gain.  At least you avoid the worst of the drawdowns by reducing your risk.

The Variance of the SPY (or S&P 500 Equity Index ETF) is staying relatively constant at 9.14 x 10-5.  It's returns are down, but still a relatively safe bet.

We ran 11,176 tickers that traded in US equity markets (and were listed on those US exchanges) today.  Out of those stocks, we found 1,126 dogs, stocks that are liquid, have at least $100M in equity market capitalization, pass all of our data validation, and lose money.  So, these are the bottom of the pile, 

Money losing stocks have a higher level of price variance (more risky) by a factor of almost 3:1 to profitable companies.  Their variance is 3.5 x 10-4.  They do have a higher expected return. Personally, we own 2 money losing stocks that trade at absurdly low valuations (~0.6x book value and ~0.2x book value).  if they turn around their business and have good news, their returns are expected to be explosive.  However, if they don't make it, we likely lose all of our investment.

We see the same dogs every day.  This is a strange market for dogs.  It is almost like stocks that trade aggressively higher and lower, without direction, stay that way for extended periods of time.  One particular stock has no revenue, and likely never will.  A few are down-trodden biotechs with bad news and little/no chance of a drug approval.  Some seem to us like scams, where there are low floats, tight controls over shares, and the prices defy valuation.  I have looked at most of these Top Dogs and would be happy to short or buy puts on most of them.  Few can be borrowed, and the prices o the puts are very high.  Lots of biotech, and a few MEMEs.  Probably a few that should be on a compliance watch list.
LWLG, AADI, ALLK, LGVN, PHUN, RGC, INDO, CRTX, PROG, CMPI are the ten CQNS DOWN picks.

Leptokurtic and low variance list among CQNS DOWN stocks:
['CHNG', 'EARN', 'MIC', 'MLP', 'PPL', 'RCI'] 

These are the worst portfolios from a risk/return perspective found by our model:
LWLG
LWLG & ALLK
LWLG & LGVN
LWLG & RKLY

Note: we may short LWLG or buy puts.  However, in a feat of quantum entanglement, every time we think the stock is a little too high, it falls before we can move money and short it.  I wonder if anyone else thinks LWLG is a swing stock that is made to ride, but not to hold?  The puts are super expensive, so that makes it more challenging too.  

Six individual tickers scored better than the $SPY, $QQQ and $IWM:
ACCD, MRVL, PI, MXL, MARA and FTCH. These are attractive risk-return trade-offs from the CQNS model's perspective.

Net-Net: falling or flat markets are hard to play.  Take your edges where you can.

Good luck out there.
Jeff

If you want to chat during the market day, call the office at 1.847.780.4401, or email at jeffrey@quantum-usaci.com

New clients welcome: money managers and institutional please