Category Archives: etf

Too Far, Too Fast? Market Professionals Reflect Evolving Smart-Money Opinion

How good have their forecasts been? Figure 1 is the record of five years of daily forecasts for ProShares UltraPro Dow30 ETF (NYSEARCA: UDOW ), an ETF that holds derivative securities which are intended to magnify the daily percentage price changes in the DJIA index by a factor of 3 times, either up or down. Figure 1 tells what the Market-makers daily hedging-implied forecasts for UDOW over the past 5 years have produced as net profits for a wide range of imbalances between upside and downside prospects. Those imbalances are measured by the Range Index [RI] which tells what percentage of the whole forecast range lies below the market quote at the time of the forecast. Figure 1 also indicates how often the forecasts were able to produce a profitable outcome, operating in a realistic, time-constrained portfolio management discipline. Click to enlarge So what did MMs see earlier, see now? Here is the current picture of probable coming UDOW prices, along with similar once-a-week forecasts over the past 2 years. Figure 2 (used with permission) The vertical lines of Figure 2 are the price range forecasts for UDOW implied by the MM community’s hedging actions to protect firm capital exposed during buyer~seller balancing to “fill” volume trades. The forecast of 5 weeks ago was from a then-price of $46.54 and a Range Index of -11. Now it has a quote of $64.72 and a Range Index of 57. A week ago the price of $59.49 carried a RI of 51. Figure 1 suggests that buys of UDOW at today’s RI level of 57 in the past might produce only a +2% payoff from here, instead of the upwards of +12% that had been experienced by -11 Range Index forecasts earlier. The +2% prospect is reinforced by the row of data in Figure 2 as the actual payoff experience achieved in 108 of the 1261 days for which UDOW forecasts were available. Forecasts that had RIs of around 57. The current forecast is more optimistic than past experience; it projects a potential gain of +5.6% Odds for reaching the current payoff prospect remain high, with priors producing a profit in 84 of every 100 among the 108 experiences. The fact that gains better than three times the earlier forecast’s average payoff already have been experienced makes one wonder if the “other shoe might drop” any time now and markets might start to back off. To ease such concerns, it is appropriate to know as UDOW prices were rising during this past week, its MM expectations rose faster. The outlook gains pulled back RIs which on a couple of days were at 68. Continued rising expectations, at a gain rate faster than prices, will put strength under a continued market price rise, albeit at a slower pace. Failure to do so may signal weakening market enthusiasm. We’ll have to see what happens. It can be monitored on blockdesk.com., along with expectations for the VIX index and VIX-based ETFs. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Rational Vs. Irrational Investor

By Kevin Hansen, Director Business Development – Retirement Solutions, Principal Financial Group, Principal Funds Distributor, Inc. On occasion, we all make questionable decisions and reach incorrect assumptions. Often, this is due to cognitive biases – built-in tendencies that we all share. Many social psychologists believe cognitive biases help us process information more efficiently. But in some situations, these biases can lead us to make serious mistakes. When it comes to investing, it’s important to recognize (and hopefully avoid) the negative impact of cognitive biases on your financial decisions. I highlight four of these biases below and point out some rational responses to counteract them. Irrational Bias 1: Overconfidence Investors who see their portfolios rising for extended periods can easily forget previous down markets. This overconfidence can lead them to make risky decisions. Research shows that men are particularly vulnerable to this bias. According to Brad M. Barber, Professor of Finance at the UC Davis Graduate School of Management: “Men tend to be more overconfident than women, and overconfident investors tend to think they know more than they actually do.” Rational Response In these situations, revisiting your comfort level with risk could help you get your confidence in check. A quick call or email to your financial professional could also give you added insights. Irrational Bias 2: Anchoring The concept of anchoring revolves around people’s tendency to cling to a single piece of information during the decision-making process. This is often the first information they encounter. Once the “anchor” is set, other judgments are made based on that anchor. Consider an investor who first encounters a mutual fund that is priced at $22 a share. If the price of that fund later drops to $18.50, that person may think he or she has found a “bargain.” In reality, however, the original $22 price may have been overvalued. Rational Response Evaluate an investment based on a variety of fundamental metrics over time. Focus on the overall asset allocation plan and less on the day-by-day prices of individual investment options. Irrational Bias 3: Loss Aversion As Nobel-Prize winner Daniel Kahneman discovered, a loss generates 2.25 times more pain than the pleasure generated by an equivalent gain. A loss of $1,000, for instance, could only be offset emotionally by a gain of at least $2,250. This level of emotional “pain” could easily lead an investor to sell during periods of volatility – just to make the pain stop. Rational Response Focus on your goals for the long term to help avoid this pitfall. Irrational Bias 4: Mental Accounting Our brains have a natural tendency to organize information. When it comes to money, we tend to view some assets as being different from others based on their source or intended use. This can be helpful for investors who set aside a specific amount of money each month for retirement or another goal. That money is off the table, in a sense, because it’s in their mental “savings” box. In other situations, however, this can work against investors. A modest but unexpected inheritance is a good example. Because those inherited assets aren’t part of the investor’s current financial plan, he or she may feel like it’s “fun money,” even though investing those assets could go a long way toward helping the investor achieve an important financial goal. Rational Response Working with a financial professional on a “save some/spend some” plan to help overcome this bias. The Payoff Of Rational Thinking Emotional investing can be costly. Taking a rational approach, on the other hand, can help you focus on the essential elements of successful investing – a diversified approach and a focus on the long term. Asset allocation and diversification do not ensure a profit or protect against a loss. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc.