RISK OFF with risk-free rate at 4.625% and expected return to US stock 'risk' assets at 8.57%
We ran our analysis last night (Saturday night) with all corrections, adjustments and permutations made to our input parameters. We continue to learn more and evolve our understanding of stocks, ETFs, and the behavior of stocks. For example, we knew foreign companies trade differently, but now we see another way it happens, and how to account for it. We account for it without removing the foreign stocks anymore from our analysis.
With 3,076 stock passing our data validation last night (higher than it has been in a long time), and an expected return of all of those stocks, held evenly, of 9.12% and a variance of 3.434 x 10-4, we ran our models deeply. In fact, we have been running a few solvers all day today (still running), just to see where we end up. Not sure anything will change, but this way we feel more confident in our solutions.
1. The best individual assets are the ETFs that hold multiple stocks or bonds. That would make sense as ETFs with more than one asset should have lower risk than individual stocks without diversification.
2. The best CQNS Long stock portfolio (all common stocks or ETFs held evenly) hold 49 equities. The edge is tiny, 6.4 x 10-5, which is at least 1/5 the normal edge or alpha from the model. This is a very small edge, and may not be worth the transaction cost of managing 49 assets every day.
So, we are risk-off in our stock picking.
What would have to change to bring us to risk-on?
1. Risk free assets yield less. Today's yield of 4.625% seems low by historical standards, but is exceptionally high compared to zero. We could go back down again to ZIRP, or the zero interest rate program by the US Federal Reserve Bank, but likely not for a while.
2. US Equities become worth less when compared to intrinsic or fundamental value, and they are expected to rise. This could be due to a short-term liquidity driven event. It could also be a drop based on large-scale trades and positions by hedge funds, investment managers, and insurance companies. They do rotate positions.
So, what is an individual investor to do?
Stay conservative this coming week. Buy risk-free assets yielding 4.625% or more, and invest in passive equity index funds or ETFs. Avoid speculative bets on individual stocks for the short term.
Jeffrey Cohen, President
US Advanced Computing Infrastructure, Inc.
PS: If you still want us to deploy your assets based on the Chicago Quantum Net Score model, please contact us. We would be glad to work with you and our custodial agent, The Charles Schwab, to make this work. We can also work with your existing broker or investment manager.
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