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.
Bearish

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.
Jeff

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.
Jeffrey Cohen
Highland Park, Illinois
Registered Investment Advisor

This is not investment advice.
[email protected]
​+1.312.515.7333

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.