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:

1. Mean
2. Variance
3. Skewness
4. Kurtosis

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.

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:

• High-BETA stocks: These are very high risk stocks. They dropped more than an equity index.
• Chips and Semiconductor stocks: These are higher risk stocks. They dropped more than the index.
• Platykurtic & Low Variance: These are extremely low risk stocks. They rose when the index fell.
• Leptokurtic & Low Variance: They are also extremely low risk stocks, but with a higher chance of a big surprise. They also rose when the index fell.

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)