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The video is titled US Stock Market Facts, Ideas and Thesis (FIT) | Chicago Quantum Insights
We recorded it today and think it should be helpful in understanding the market today (Friday September 15).
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US Stock Market Facts, Ideas and Thesis (FIT) | Chicago Quantum InsightsWe made a new video: US Stock Market Facts, Ideas and Thesis (FIT) | Chicago Quantum Insights9/12/2023 By Jeffrey Cohen, US Advanced Computing Infrastructure, Inc.
Variance of market prices continues to fall. $SPY variance is now 3.2 x 10-5 on a base 10 power log. It was 3.6 x 10-5 not that long ago. Expected market returns and risk free rates of return are approaching parity. Why invest in this case? Riskfree rate = 5.20% Actual SPY return = 3.90% Use floor S&P500 rate = 8.00% Actual IWM return = 1.72% Use floor Russell 2000 rate = 8.00% Actual QQQ return = 14.62% Use actual NASDAQ 100 rate = 14.62% =========================================== Expected market return = 5.01% Market index floor and ceilings 8.00% 20.00% Risk Free return: 5.20% There are still many stocks listed on US exchanges that are doing business, or have their HQ, in other countries. The list is long and remember that we found that these stocks have higher variance than US operating companies. If you want a little more excitement, go with foreign names. (We provide a list of all companies that pass data validation that are foreign domiciled, and the country). If the BEAR market was truly running, I would expect to see these listings drop away over time. We are analyzing 3,014 stocks today, with a market capitalization over $10MM. We did remove a few outliers, ok, maybe a few hundred of them. Those were business Development Corporations and stock holding companies. We also removed companies paying one-time dividends that skew our results. The six best individual stocks in today's run, after removing $AFRM which is the #1 stock, are all statistically insignificantly better than the $SPY. We see old friends in this list, and one brand new entrant. $SQ $CZR $U $SYNA $TROW $BX before we get to $QQQ $SPY $SHY and $IWM. This does not mean these stocks will go up, but that their risk is down while their BETA is up (relatively speaking). So, they provide a 'wild ride' but you also get to wear seat belts. The stocks with very high volume relative to last year are mostly new names. These might be due to earnings, or speculators placing their bets in small cap stocks. Our model prefers high BETA stocks over low BETA stocks today. Our model found the same portfolio, or only slightly different, with 11 stocks held evenly. This is across the different solver and search methods. These are new economy stocks, with a strong proportion exposed to bitcoin. The ending portfolio has between 11 and 17 stocks within a 10% range of ALPHA. These portfolios have these stocks held evenly. Dividends are higher than I recall in a while. This is most likely a combination of high historical dividends paid out in the past year, and low stock prices. There are many negative BETA stocks in the list today. Did you know that Chicago Quantum is the home of the Negative BETA stock list? $AGLE -0.048 Aeglea BioTherapeutics Inc $AKRO -0.314 Akero Therapeutics Inc $CANO -0.033 Cano Health Inc $CDTX -0.298 Cidara Therapeutics Inc $CPK -0.834 Chesapeake Utilities Corp $CR -0.039 Crane Co $RLMD -0.145 Relmada Therapeutics Inc $SQQQ -3.696 ProShares UltraPro Short QQQ -3x Shares $TZA -3.330 Direxion Daily Small Cap Bear 3X Shares $UUP -0.221 Invesco DB US Dollar Index Bullish Fund $UVXY -2.808 ProShares Ultra VIX Short-Term Futures ETF 2x Shares $VERU -0.183 Veru Inc $VIXY -1.898 ProShares VIX Short-Term Futures ETF Final point is that we see more stocks undergoing a stock split, with about an even number being reverse stock splits. My guess is that this is becoming more common...and therefore less of a factor in ongoing stock price movements. Some of these were paid in stock, and others were business divestitures, while others were paid in cash. A number above 1.0 means a reverse split, where the number of shares outstanding is reduced to raise the stock price (usually above $1.00). $ABEO 25.00 Abeona Therapeutics Inc $ADEA 0.50 Adeia Inc $ALPP 8.00 Alpine 4 Holdings Inc $AMC 0.61 AMC Entertainment Holdings Inc $AMRK 0.50 A-Mark Precious Metals Inc $AMZN 0.05 Amazon.com Inc. $APTO 15.00 Aptose Biosciences Inc $ARVL 50.00 Arrival $ATHX 25.00 Athersys Inc $BIOR 25.00 Biora Therapeutics Inc $BIP 0.67 Brookfield Infrastructure Partners L.P $BIPC 0.67 Brookfield Infrastructure Corp $BN 0.81 Brookfield Corporation $BRDS 25.00 Bird Global Inc $CEI 50.00 Camber Energy Inc $CHDN 0.50 Churchill Downs Inc. $CKPT 10.00 Checkpoint Therapeutics Inc $CPRT 0.50 Copart Inc. $CTO 0.33 CTO Realty Growth Inc $CTRM 0.66 Castor Maritime Inc $CXT 0.34 Crane NXT Co $DBRG 4.00 DigitalBridge Group Inc $DXCM 0.25 Dexcom Inc $EHC 0.80 Encompass Health Corp $EMBK 20.00 Embark Technology Inc $FBIN 0.87 Fortune Brands Innovations Inc $FTAI 0.84 FTAI Aviation Ltd $FTNT 0.20 Fortinet Inc $GE 0.79 General Electric Co. $GME 0.25 Gamestop Corporation $GNUS 10.00 Genius Brands International Inc $GOOG 0.05 Alphabet Inc $GREE 10.00 Greenidge Generation Holdings Inc $GROV 5.00 Grove Collaborative Holdings Inc. $GTE 10.00 Gran Tierra Energy Inc $HEXO 14.00 HEXO Corp $HIPO 25.00 Hippo Holdings Inc $IMPP 15.00 Imperial Petroleum Inc $KNTK 0.50 Kinetik Holdings Inc $MARK 10.00 Remark Holdings Inc $MDU 0.69 MDU Resources Group Inc $MNMD 15.00 Mind Medicine Inc $MNST 0.50 Monster Beverage Corp. $MULN 25.00 Mullen Automotive Inc $NDAQ 0.33 Nasdaq Inc $NLY 4.00 Annaly Capital Management Inc $ORC 5.00 Orchid Island Capital Inc $PANW 0.33 Palo Alto Networks Inc $PCAR 0.67 Paccar Inc. $PSFE 12.00 Paysafe Limited $RIDE 15.00 Lordstown Motors Corp. $ROOT 18.00 Root Inc $SAFE 6.25 Safehold Inc. $SAFE 0.78 Safehold Inc. $SDIG 10.00 Stronghold Digital Mining Inc $SFT 10.00 Shift Technologies Inc $SHIP 10.00 Seanergy Maritime Holdings Corp $SHOP 0.10 Shopify Inc $SNDL 10.00 SNDL Inc $TECH 0.25 Bio-Techne Corp $TNXP 6.25 Tonix Pharmaceuticals Holding Corp $TSLA 0.33 Tesla Inc $TWO 4.00 Two Harbors Investment Corp $WISH 30.00 ContextLogic Inc $WTER 15.00 Alkaline Water Company Inc (The) $XPO 0.61 XPO Inc The best Chicago Quantum Net Score portfolio chosen today, for a long investor, contains these 11 stocks: ['APPS', 'CDLX', 'HUT', 'MARA', 'MSTR', 'NVTA', 'PACW', 'REAL', 'SLQT', 'U', 'W']. Update at 0920: These 11 stocks, plus $AFRM, are not active at this moment in pre-market. Only 4 traded, with 2 up and 2 down. We will track and report. GLTA We see a fall in risk-free interest rates, and this is bullish for stocks. It creates an incentive to put money back to work in risky assets. UST 10-year yield: 3.395% UST 1-year yield: 4.332% UST 3-month yield: 4.293% UST 1-month yield: 4.150% Our Chicago Quantum Net Score risk-free rate of return is: 4.30%. This has the effect of increasing the expected return to risk assets (the return over risk-free) to 4.27% from under 4% earlier this week. This means the model 'CQNS Power' or the relative strength of expected return over historical risk is 3.35, which is slightly elevated over early this week. This isn't enough of a change in the risk free rate to make a big difference, but it is on the way. The expected return of 3,407 / 3,419 stocks (and ETFs) that pass data validation today is 9.29%, which is also elevated from recent weeks. Why is that? The BETA of the stocks are increasing as the risk or volatility of all individual stocks rise. Why would the risk of all stocks rise? Could be reduced liquidity, increased speculation, bets on ODTE options, bets on normal monthly options, or something else completely. It also could be a reduction in the historical risk in the S&P 500 Equity Index, which we have seen, coupled with a slight increase in individual stock volatility. Regardless of the causality, the expected return of a large basket of stocks is above inflation, or 9.29%, and the expected return to risk (the portion above risk-free rate) is now 4.27%. If this trend continues (lower interest rates and higher market returns expected), then we will see a return to risk-on behavior. Only time will tell. Today's stock run (valid for Monday morning, March 20, 2023, has 26 stocks held evenly, and the edge over the runs earlier this week is up about 20%. So, fewer stocks and a higher edge. Part of that could have been due to the inclusion of ETFs into the CQNS UP run universe of stocks, but none of those ETFs are in the optimized portfolio. Net-Net: The reduction in risk-free interest rates, and the slight reduction in volatility for the S&P 500 is bullish for the US stock market, and our model has shifted to Risk-On for Monday morning. Here is the rest of our BLOG post for the markets. We included this in today's video on Youtube. We discuss the results of our Chicago Quantum Net Score quantitative analysis, which suggests to take a little more risk in stocks. The market appears to be turning slightly risk on, and we sense that Monday should be an interesting and good day to trade. Here are some overall points we made during the recording, and in the live chat. 1. Interest rates are falling aggressively. Large moves to make bonds more valuable, and interest rates to fall. 2. The VIX or implied volatility against a fall in US stocks, is significantly higher now. It has been screaming higher this week, showing that the cost of insurance against a stock market fall is significantly higher than a few weeks ago. It is above the trend. 3. Energy prices (both oil and gas) have fallen through the floor. Prices are down for Oil about 18% in just a short time. That is ua dramatic fall. We give a prediction on why this is. It's in the video, and a bold and shocking ideal We also discuss the $UBS and $CS corporate action, where UBS buys CS for about two billion dollars, along with Swiss Government Guarantees. This is when you get your shopping list dusted off. Good luck to all.  Good evening. Markets closed on an up note, and interest rates are like bumper cars. Commodities, currencies, stocks, bonds...everything is in motion. Truth is, our model called today as a risk-on day, and the best portfolio had only 35 stocks, whereas the day before it was 65 stocks.
Today, we are going to try something different. Wish us luck, and we will report on our results: 1. We added many ETFs to our run in the areas of the US Dollar (long and short), commodities including a bitcoin fund, passive US stock indices, a short stock index, and some VIX related ETFs. We tried to ensure they were all large, liquid and heavily traded. 2. We raised the risk-free rate again back to 4.7%. Why? The 13-week UST bill went up a bit today. Also, there are now bank accounts, FDIC insured, that are paying 5.0%. So, your risk-free rate, at least up to $250k FDIC insured, is 5.0%. We split the difference and hold it at 4.70%, which is roughly what you make, bond equivalent yield, if you go to treasurydirect.gov and bought the last 13-week issue on March 13, 2023. Finally, on a technical note we removed our matrix-based solvers (again) to speed up the run. Each one of them takes too long, and is not giving a very good answer when compared to our custom heuristic solvers. We have ideas on how to accelerate those, and improve our D-Wave Systems results, but that will take time we did not have today. Coding time. Finally, want to say thank you to the market today. Our portfolio went up a little, and that makes us happy. Jeffrey Cohen President and Investment Advisor Representative US Advanced Computing Infrastructure, Inc. Chicago Quantum Good afternoon, it's Jeffrey Cohen
The markets are on fire so it is harder to focus on math, matrices, and tuning algorithms. However, we have a theoretical breakthrough last night, and will work to test it over the next days/weeks. Promising idea. We are encouraged. The biggest issue for us is that we run our algorithm on the D-Wave system and it has to be placed carefully on the almost 6,000 quantum bits available to us. Each placement is a stock, and the stocks need to be connected to each other. However, since there are only 6,000 positions, we can only connect 118 stocks. In reality, the system handles 64 or 80 stocks better as the placement or loading of the stocks on to the quantum bits can me more resilient. So, we have to get our best 'bang for the buck' with 64 or 80 stocks, and up to 118 stocks. We can run our algorithm 100 or more times (think of this as generations in a genetic algorithm). We also reviewed the D-Wave Systems 10-Q from November 2022 today (again). The financial situation of the company is not encouraging. There is not enough revenue to support the significant investments in research and development, and to cover the growing costs of General and Administrative expenses. Many of those expenses may be tied to being a public company listed in the US. The liabilities seem to be slightly larger than the assets...so the company needs to either raise more money or transform their early-stage startup in to a 'mean and lean' technology firm. We have always appreciated their technical support and assistance, and their politeness and supportiveness of our new quantum computing startup. We think the team at D-Wave is the best and we hold a small position of common stock warrants as a show of support that we believe in the future of this company. We will be trying to work a new approach on how we load our QUBO (V*M*V^T) onto our matrix, and the lift and shift required to get the best answers. This will take some time and effort, and the 'a-ha' moment for a new approach came last night. For more information, contact Jeffrey Cohen at jeffrey@quantum-usaci.com. We are accepting new clients.  The one-month US Treasury yield is 3.67%, down 0.617%. In bond speak, that is a decline of '62 basis points.' That is a monumentally large move lower in interest rates. This is significantly below the US Federal Reserve Bank Fed Funds Rate, or Policy Rate.  The one-year US Treasury yield is down 0.442% to 4.079%, or down 44 basis points. This is another significant move lower in interest rates. The ten-year US Treasury note is yielding 3.407%, down 0.283% in yield, or down 28 basis points on the day. This is another significant move for an important, benchmark interest rate. This rate is used to set US residential mortgage rates.  There is a big meeting at the Federal Reserve Bank where they set interest rates and determine the size of the asset register at the Fed. These market moves take interest rates back down to below the Fed policy rate, and in a way undo the work of the last year. We have seen high inflation in the US, with the CPI-U up 6% over the past year and a strong rise in January and February. On the other hand, the Producer Price Index was down slightly in February after a rough rise in January.  And the anomaly in the system is that while interest rates are declining, which is bullish for stocks, the stock market is declining. Bonds and stocks declining together is like cats and dogs living together. It rarely happens, and normally indicates something is wrong. We made a detailed video today about the markets, and here were our take-aways. This should provide more context to you. 1. Interest rates are falling aggressively. Large moves to make bonds more valuable, and interest rates to fall. 2. Energy and industrials / hard side of the economy are down. Recession fears? 3. Financials are still falling, almost down 3% 4. The US Dollar is stronger, despite falling UST interest yields. The world is doing worse? The US is a safe haven? 5. The Chicago Quantum Net Score would be (most likely, and on an ad-hoc basis) outperforming the S&P 500 today, on this risk-off day. 6. Bitcoin is up to $24,700, and it was recently at $20k, so it is up 25%. 7. European weakness in their banking sector weakens the Euro / USD exchange rate. Mixed overall stock results, with significant weakness in large, industrial, energy, financial and to a lesser extent, technology stocks. This is when you get your shopping list dusted off. CQNS best answer is 65 stocks to have a better risk-return tradeoff than the S&P 500 Equity Index ETF. This is a very large answer, and reflects a need to diversify holdings. The individual stock picking approach is not in alignment with our Chicago Quantum Net Score model. For tomorrow...if interest rates stay low tonight, we will run or model with a lower risk free rate, which increases the relative benefit of equities. Let's see what happens. Good luck to all! GLTA! Good morning readers,
Our Chicago Quantum Net Score model found the best solution last night with 62 US-listed common stocks, giving an edge of 7 x 10-5, which is a meaningful, but smaller than usual edge over investing in the $SPY, or the S&P 500 Index ETF. This is based on our proprietary platform and algorithm to find portfolios with the biggest difference between the portfolio's historical risk and expected returns. A portfolio that requires 62 stocks to gain an edge on the market is calling for significant diversification, with a holding pattern similar to the S&P 500. The top 25 portfolios have between 59 and 63 stocks. Our portfolio model selects a group of stocks that are held evenly, so 62 stocks means 1/62 of your portfolio is invested in each one. Our portfolio model excludes ETFs, so you will not end up holding multiple 'copies' of a popular stock. We are considering to add back the commodity ETFs as that can give an investor an additional edge. We are thinking of ETFs like SLV (silver), AAAU (gold), USO (oil), and CPER (copper). Why is the model risk off? We see three potential reasons: 1. The expected return and the risk-free rate of return over the next 12 months are converging, and the expected benefit of holding risk is 4% or less today. That means our model is mathematically looking at reducing risk more than it is looking at increasing returns. Lower risk means greater numbers of stocks. 2. A rising tide lifts all boats in this market. It is possible that there are fewer situations where stocks counter-act each other, and have negative (stock - stock) correlations. 3. The large-cap stocks are starting to see a 'flight to safety' and are less volatile in this liquidity constrained market, so they are relatively more attractive than small cap stocks. This last one is a stretch. We do see negative BETA stocks in today's run, so there are still anomalies out there. These move opposite to the SPY and have done so for the past year. Here are the stocks with BETA values outside the data validation range. CDTX -0.370 Cidara Therapeutics Inc CPK -0.611 Chesapeake Utilities Corp CYN -0.532 Cyngn Inc FWBI -0.369 First Wave BioPharma Inc GWAV -0.468 Greenwave Technology Solutions Inc MFH -0.185 Mercurity Fintech Holding Inc MKUL -0.593 Molekule Group Inc SMMT -0.135 Summit Therapeutics Inc UHAL -1.361 U-Haul Holding Company VERU -0.885 Veru Inc Good luck to all. Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc. Chicago Quantum
I often wonder why my youtube video channel is stuck in the 300s of subscribers, my twitter account is under 3,000 followers, and my medium articles get maybe 100 reads per month.
There is an art form to social media and I obviously don't get it. However, I am learning... Check out the following tweet and two replies. This is art.
We like to track stock variance. This is how much stock prices move each day, without concern about direction. We have seen stock price variance increase since at least May 2022 when we started measuring this.
On February 27, 2023, the stock price variance of the S&P 500 Equity Index ETF, or $SPY, had its variance peak about a week ago, and now is down one tick. It isn't much, but it might be signaling a peak in variance. Once variance in stock prices fall, it will reflect a lessening of speculative interest and activity. This will be good for some stocks (those that are being shorted aggressively), and bad for others (stocks that will fall until they reach a natural support level). What is the level? For a year ending 3/27/2023 (inclusively): SPY: 397.73 (end) 420.64 (start) Variance: 0.00022400 For 1,640 stocks with a market capitalization of $2B or more, the variance is: All Stock Variance = 0.0002843 You still 'save on variance' if you buy and hold a market-capitalization weighted index or basket of stocks. We report kurtosis in our Chicago Quantum Net Score analysis for clients on a daily basis. We analyze the daily stock price changes and we compare then to various normal distribution. We look at kurtosis, or the fourth movement of stock prices, and skewness, which is the third movement. You can think of those statistics as derivatives of stock price changes:
Today, a stock that we reported to be very highly leptokurtic fell around one quarter in value, or around 25%. Over the day, it was still down 21% when we checked. Here is the quote below (source: Yahoo Finance). We consider the list of high kurtosis and low variance stock an 'early warning' list, and that early warning came true today for $TGNA Tegna Inc.  This was so interesting that we made a video: Leptokurtic Stocks, Early Warning that came true for one the stock $TGNA of one company Tegna Inc. Here is the video below. Video link What is a leptokurtic stock? A stock with a leptokurtic stock distribution is one where the probability of the next random sampling (e.g., tomorrow’s price change) being a high standard deviation move or outlier is greater than for a stock with a normal distribution. It is like a bell shape curve that is raised off the x-axis, or has more ‘room in the tails.’ For us, we use this as a means to invest in either stock options or to look at stocks to hold in an optimized long portfolio. To that end, we couple our analysis of kurtosis with low variance stocks. These stocks really stand out as seeming low risk, but with a chance to leap. They are unique and fairly rare. There are currently seven of these stocks: Ticker, Kurtosis Score (standard), variance (normalized) ATVI, 5.91, 0.0001110 GIS, 5.21, 0.0002181 HRL, 10.91, 0.0001821 HSY, 5.30, 0.0001910 K, 6.93, 0.0001952 PINC, 6.49, 0.0002068 SJM, 13.32, 0.0002199 We suggest to our clients that they should keep track of stocks with a high kurtosis score for a sense of the safety of the stock. A leptokurtic stock with a low variance normally should not move much, but on occasion it will move much more than its standard deviation suggests in a normal distribution. Today, $TGNA or Tegna, Inc. moved down 21%. This is a huge move when the other leptokurtic and platykurtic stocks with a low variance moved 2% or less, with most moving around 0.5%. In this case, a stock that was called out as being leptokurtic within the past month had its early warning come true. What does this mean for stock market investors? It means that you should know which of your stock positions are highly kurtotic, and consider ways to adjust your portfolio. If you are worried about your stock falling, and it is low variance and leptokurtic, maybe buy a cheap put option? For more information, and for our periodically updated list of leptokurtic stocks, please visit our webpage here. Jeffrey Cohen President, US Advanced Computing Infrastructure, Inc. Illinois Registered Investment Advisor Quick post on a Sunday
1. The expected annual return to risk-off assets is 3.77%. That is not very much for risking your capital. This is based on a 4.80% riskfree rate of return and 8.57% return to US stocks (highly diversified holdings), or other risk assets with return parity. There are 1,632 US listed stocks with market equity capitalization above $2 billion. The expected return of holding all of those stocks is 8.87%. 2. The best individual stocks picked by our model are lower risk, and the worst are the higher risk "MEME" or speculative stocks. 3. The best portfolio available has 32 stocks, followed by a 33 stock and a 41 stock portfolio. There are stocks that are household names and others that are a little more edgy, with high dividends paid last year, or some risk behind their names. We have been seeing significant rotation in this list over the past 2 weeks. -0.000053 ['AAWW', 'ACI', 'AFG', 'ALRM', 'ATVI', 'BMY', 'BSM', 'CLBK', 'CLX', 'EQC', 'FROG', 'GEN', 'GOOGL', 'ICL', 'IEP', 'JNJ', 'K', 'MCD', 'MRK', 'MSFT', 'PCAR', 'PEAK', 'PNM', 'QGEN', 'RBA', 'TGNA', 'TJX', 'TRI', 'TSEM', 'TXN', 'YUM', 'ZIM'] 32 There is only one negative BETA stock left in the run. It seems that all the fish are now swimming with the school. UHAL -1.270 U-Haul Holding Company . The negative beta of 1.27 means that U-Haul moved 127% of the movement of the S&P 500 Equity Index over the past year, but in the opposite direction. The overall volatility of the market (variance of price changes) has not changed. It is elevated and flat, in a relative plateau for the past months. What will happen when the market settles down? Good luck in the markets today. Please subscribe to our youtube channel for up to date analysis. That is free. Here is our twitter channel, where we post varied and diverse content. By Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc.
I am working on make the run go faster without giving up value. We already cut the solver run time by ~70% and get the same CQNS answer. That is a good start. In fact, today we added back 10% of our horsepower in our solvers (so maybe it will be 63% faster, just to be sure we don't miss any good solutions). Now, the hard part. We need to speed up the data collection process. This has always been the sloppy part of our code. Lots of if, then, else statements. Lots of calls. Lots of data (and memory) to be able to write out a huge spreadsheet that we only use occasionally. This spreadsheet is great when we are doing fundamental analysis, but not when we are in a hurry to 'see the picks.' So, our current step is to see what data and output is superfluous. We love our BETA, market cap, dividends. We use them in our math. Also, Chicago Quantum is the home of the Negative BETA stock list :-). However, there were a few hypotheses we tested a few years ago. Things like price and volume spikes. Stock splits. Do we really need them? Maybe not in the run_really_fast parameter setting. We created a detailed spreadsheet that we use for fundamental analysis. It has valuation info. Likely most of that can go. So, here is the initial list of variables and outputs that can go. This will simplify the run_really_fast parameter setting run. Data to cut from inputs and outputs: 1. Cash Flow From Operations 2. Long Term Debt Net Income Common Equity AOCI Last day volume as a % of average Variance (normalized) Stock splits There will be more...this is the first part of the list. Your feedback is welcome! Please comment below or directly contact me at +1.312.515.7333 (cell) or jeffrey@quantum-usaci.com (email). By Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc. Our first article was on how to deepen your analytical rigor and portfolio optimization math to find better investments.
The second was on how credit quality is slipping quickly, since July 31, 2022 to through January, 2023. If the US consumer is struggling 50% harder (defaults and delinquencies up ~50%) to pay their credit cards and their car loans, and they are borrowing more, how are they going to buy new things and keep the economy growing? This is a recession warning to us, and so it matters even more to have a firm grasp on the US stock market and how to stay safely invested. Many will ask whether they should pull out their life savings and what to do with them. Some fear the unknown and panic. What we say is to stay invested, not to take risk in flashing cash around, and most importantly: 1. Allocate a little more of your money into risk-free assets For example, if you are a US Citizen, take $10,000 out of more risky investments and buy US Savings Bonds, iSeries. If you have larger savings, maybe put some money into US Treasury bills via TreasuryDirect.gov, where there is no cost and you can invest side by side with Very Large Banks by bidding non-competitively on 4-week, 13-week, and even 52-week Treasury Bills. These are yielding between 4.5% and 5.2% currently. 2. Stay diversified If you have some 'high flyer' stocks, maybe sell a little and put the proceeds into diversified index funds. If you have concentrated bets, maybe loosen them up and spread them around more. Our model suggests that instead of investing in 2 or 3 stocks (as when the market was rising), now it wants us to hold 38 stocks evenly, and many are household names in consumer staples, pharmaceuticals, fast food, snacks and beverages...companies that will do well when recession hits. Good luck in the markets today. Here is a link to our Medium profile: chicagoquantum dot medium dot com. By Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc.  The S&P 500 is finally back to within a relatively tight set of bollinger bands. You can see that it was trading above the bands on the way up, and below the bands on the way down, and occasionally traded in the bands when it looked to change direction (Oct 2021, April 2022, & August 2022). It has been largely trading within bands since October 2022. Key settings: 20 periods (weeks) 1 standard deviation Exponential moving average Close prices There have been some weeks recently in 2023 where the market traded above Bollinger Bands as it tried to break out of the bear market pattern. That did not last and we are now trading closer to the middle of the bands as the market corrects. Why the correction this time? Interest rates rising as inflation did not cool as quickly as expected by the Federal Reserve Bank and the Markets. So, the fear of rising interest rates, and the sense that monetary and fiscal conditions will tighten pulls money out of the market.
In our words, we are calling this a RISK-OFF market because risk-free rates of return that you can lock in, risk free, right now, are rising to within 4% of the expected return that you hope to get by investing in risky assets. So, a bird in the hand is worth two in the bush, and 4.7% is worth at least 9.4% in expected returns...but our model is only calling 8.57%. In this case, market participants may be incentivized to take the bird in the hand. We are stretching this metaphor because I would usually want three birds in the bush in return for releasing the one in the hand, and that would require an expected market return of 3 x 4.70 = 14.1% expected return to risk, or a PE ratio of ~6.5x for a broad, diversified index. So, what happens now? The market has been trading in Bollinger Bands since October 2022, and the recent attempted break out to the upside has been quickly brought back. So, do we bounce off the bottom, test the top again, or move in a consolidation pattern for a few more days or weeks? This is why we are risk-off. The market is not climbing, nor is it falling...it is choppy and moving sideways. If you need to be invested in stocks, look at increasing your diversification and pulling a few more chips off the table and putting them in safe, risk-free assets. Not all of them, but a few. We believe that we need to see material economic news to drive a shift in stock prices. Keep your eyes on the news, and your own 'main street' economy. Good luck in the markets. GLTA. Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc. Chicago Quantum By Jeffrey Cohen, President, US Advanced Computing Infrastructure, Inc. Chicago Quantum Highland Park, Illinois 60035 Financial planning, investment management, and portfolio optimization services Today we made a youtube livestream video and discuss that we see the US stock market as risk-off. We discuss how we come to this conclusion, and what it might mean to you as an investor. Risk-off markets means that the expected returns to investing in risk is lower, and the expected return in investing in risk-free assets is higher than it was before, and the difference is too small for many to take that risk. The expected return to risk in our quantitative models is just under 4%. Would you risk your wealth for a 4% per year expected return? Would you rather buy a US savings bond, put money in an FDIC insured savings account, or invest in short-term (4 week, 13 week or 52 week US Treasury bills)? Every time the risk free rate of return rises (it is now 4.70%) and the expected return of the stock market falls (now 8.57%), it lowers the expected return to taking risk (now 3.87%). Given the new inflation readings this past week (CPI and PPI both up dramatically), many investors expect the US Federal Reserve Bank to raise policy interest rates again, and further tighten the money supply (which keeps rates high by making money harder to borrow). The stock market is in a bear market, with the trend decidedly negative, although the past few weeks have seen the market rally above a straight line we drew on a chart to highlight that downward trend. It is possible the market drops down to that line...and follows the pattern of the past six months. We believe the market will trend lower for a few months while interest rates continue to rise and the economy continues to cool, before there is a chance of a market recovery.  Interest Rates are rising over the past year.  The stock market is in a committed downturn, but has risen significantly in the past 2 months. If the market resumes its trend, it is expected to go lower. Our model has a simple suggestion for investors. If you must invest in US equities, whether due to a core belief, your investment objectives, or just what you think is right, then you should invest in a large number of stocks and diversify your positions. The typical stock in your portfolio should be lower risk than before. These could be stocks in defense contractors, pharmaceuticals, consumer products, food, large technology firms, or dividend-paying 'safe bets.' On February 18, 2023, we ran our Chicago Quantum Net Score model to see what the most optimized long portfolio was that we could buy and hold. This portfolio would provide the best risk-return tradeoff from buying US Common Stocks. It picked 49 stocks, held evenly. This portfolio gives the investor a relatively small edge over holding all stocks evenly, about 5.4 x 10-5, when the value of the CQNS index for all stocks is zero. (actually 12.7 x 10-19, but who's counting) Here is the optimized US common stock portfolio, held evenly (so each position is kept at a market value of ~2% of the total portfolio): ['AB', 'ABBV', 'ACI', 'AFG', 'AON', 'ATVI', 'AVGO', 'AVTA', 'BLX', 'BSM', 'CFFN', 'CL', 'COWN', 'DSGX', 'ELME', 'EQC', 'EWCZ', 'FROG', 'FTDR', 'GCMG', 'GEN', 'GOOG', 'GOOGL', 'ICL', 'IEP', 'JNJ', 'K', 'LHCG', 'LLY', 'LMT', 'MCD', 'MGI', 'MRK', 'PCAR', 'PEAK', 'PEP', 'PNM', 'RBA', 'RFP', 'RGR', 'SBLK', 'TGNA', 'TJX', 'TRI', 'TSEM', 'TXN', 'WY', 'ZGN', 'ZIM'] 49 We also looked at some proprietary indices we created to track segments of the market. Here is how three of them did on Friday, February 17, 2023:
This tells us that the market is rotating out of high risk stocks and into low risk stocks. Wish you would have know that two weeks ago? Is it too late to act now? We have been calling the market as RISK-OFF in our youtube videos since February 8, 2023, or two weeks ago. This is the link to our youtube channel, which is free. Our YouTube handle is IamJeffreyCohen. Good luck to everyone in the markets. Stay safe. Jeffrey Cohen One more point. We notice that our model is picking stocks that pay dividends. Almost all of the top 20 stocks had a positive dividend yield in the past year. This makes sense to us that stocks with dividends have lower risk. We would caution investors against buying a stock only because it pays a dividend. There should be other justifications, such as the business model of the firm, economic outlook, effectiveness of management, etc. As interest rates rise, the value of those dividends falls in today's US Dollars. (in technical jargon, the net present value of those dividends is lower when your cost of capital rises) |
Jeffrey CohenFull-time investment advisor and student of the financial markets. Archives
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