When investing, TIME is an essential resource, along with capital. Because when capital is compounded by the efficient use of time, it is far more powerful than when time is wasted, like it is under a “Buy & Hold” delusion or under “wealth-building” by dividend accrual “drips” at miniscule rates of “reward”.
Time-use effectively requires sufficiently accurate forecasts of price change, a skill honed by survival requirements. The kind of demands presented daily on Market-Makers who are required to employ their own capital in balancing the momentary demands of institutional and fund money managers. Investment managers who are constantly adjusting holdings in multi-billion-$ portfolios.
The capital risk-control needs of M-Ms’ so dictated require short-term hedging deals in derivative securities markets. Those deals, affected in their own separate markets, in turn define likely coming equity price-change limits, both up and down. The historic record of equity price changes subsequent to various up-to-down price-change prospects provide a live “scorecard” of how well current hedging-borne forecasts in each security have been made and how well they are likely to work out in comparison to other such forecasts.
That is what this article is all about, not anything to be found in present technology studies or in financial statements by themselves. What is needed is the “live-action” expectations of professionals putting their own capital at risk in the competitive scene as it is being projected now for the coming near-term. Those expectations for Williams-Sonoma (NYSE:WSM) appear to be exceptionally attractive now as a near-term wealth-building capital gain opportunity. But TGT appears to at least one big-$ fund as its own pandemic.
“Williams-Sonoma, Inc. operates as an omni-channel specialty retailer of various products for home. It offers cooking, dining, and entertaining products, such as cookware, tools, electrics, cutlery, tabletop and bar, outdoor, furniture, and a library of cookbooks under the Williams Sonoma Home brand. The company markets its products through e-commerce websites, direct-mail catalogs, and retail stores. It operates 544 stores comprising 502 stores in 41states, Washington, D.C., and Puerto Rico; 20 stores in Canada; 19 stores in Australia; 3 stores in the United Kingdom; and 139 franchised stores, as well as e-commerce websites in various countries in the Middle East, the Philippines, Mexico, South Korea, and India. Williams-Sonoma, Inc. was founded in 1956 and is headquartered in San Francisco, California.”
(source: Yahoo Finance)
It appears that some “Institutions” see far more near (3-6 month) price-gain potency than is recognized by the Wall-Street Analysts generating the immediately-above numbers. Let’s take a look at what big-$ fund expectations now appear to be, given their present trade actions in Retailing stocks.
What current Risk~Reward tradeoffs look like
(used with permission)
The tradeoffs here are between near-term upside price gains (green horizontal scale) seen worth protecting against by Market-makers with short positions in each of the stocks, and the prior actual price drawdowns experienced during holdings of those stocks (red vertical scale). Both scales are of percent change from zero to 25%.
The intersections of those coordinates by the numbered positions are identified by the stock symbols in the blue field to the right. Surprising market-average norms are suggested by SPDR S&P 500 index ETF (SPY) at location . The best trade-offs in these stocks are down and to the right. Our focus is on WSM at , which obviously has different coming-price expectations from MMs than most of the other stocks pictured.
The dotted diagonal line marks the points of equal upside price change forecasts derived from Market-Maker [MM] hedging actions, and the actual worst-case price drawdowns from positions that could have been taken following prior MM forecasts like today’s.
Those forecasts are implied by the self-protective behaviors of MMs who must usually put firm capital at temporary risk to balance buyer and seller interests in helping big-money portfolio managers make volume adjustments to multi-billion-dollar portfolios. Their protective actions define daily the extent of likely expected price changes for thousands of stocks and ETFs.
This map is a good starting point, but it can only cover some of the investment characteristics that often should influence an investor’s choice of where to put his/her capital to work. The table in Figure 2 covers the above considerations and several others.
Comparing Alternative Investments
(used with permission)
The Technicolor effect of Figure 2 is intended to heighten the awareness of today’s unusual market in retail industry stocks. Usually, we use yellow to direct attention to the featured stock, here being WSM, and to the lettered columns of most significance: E, H, I, J, Q, R, and T.
The green highlighting for Amazon.com, Inc. (AMZN) and CDW Corporation (CDW) is a peculiarity resulting from prior forecast limitations which may be best resolved by their separate attention using tomorrow’s forecasts. The Target Corporation (TGT) had a traumatic one-day market experience separating it from the other major retailers. Since AMZN and CDW will be handled separately we will include TGT in its discussion as well then by reference back to this retailing sector review.
Pink highlighting indicates data deficiency raising inadequacy concerns.
Highlighted in Figure 2 are [E] the upside price limits of the current MM forecasts detailed in [B], [C], and [D]. Prior forecasts with the same up-to-down proportions as today’s [G] produced the capital gain realizations of [ I ] when an established common portfolio management discipline was invoked. These outcomes for WSM are the ones earning its first-row position.
We rank alternative investment prospects by the same standards, processes, and outcomes, utilizing the success (Win Odds of [H]) and failure (100 – H) to weight the dimensions pictured in Figure 1. Columns [O], [P], [Q] do that. And in [R], [Q] is translated into rates of reward measures used in financial plans involving varied lengths of payoff periods – basis points per day. A basis point is 1/100th of a %. When sustained for a year, 19 bp/day = a 100% annual rate, 5 bp/day = 20%.
This allows direct comparisons between investments with distinctly differing payoff characteristics. Comparisons not requiring multi-year forecasts which are unable to be made with any useful degree of accuracy. Comparisons which current securities markets frequently present, offering highly attractive rates of reward.
Column [R] shows the striking difference between the other several Retailing related alternatives than WSM. It also highlights the difference between WSM prospects and the current expectations for the often-used market index ETF, SPY, the extensive MM-forecast population of 3200+ equity securities, and the daily ranking of the 20 most attractive stocks from that population.
Current Equity Market Prospects
SPY currently is less-optimistically regarded than usual with media spreading notions of oncoming business recession. A Range Index of 23 or less has been seen only 8 times in the last 5 years. See Figure 3 which shows the weekly trend of MM 3-5 month price range forecasts over the past 2 years.
(used with permission)
Its large upper picture plots each forecast as a vertical line, separated into upside and downside segments by the market closing price on the day of the forecast. The balance between up and down is measured by the Range Index [RI], the percentage of the whole range below the close price. This day it is 23, meaning there is more than 3 times as much price gain expected possible to the upside as there is seen likely of price drawdown loss prospect.
These proportions are the products of hedging actions taken in active open markets in derivative securities by both buyers (market-makers) and sellers (informed experienced proprietary traders) of price-change “insurance” protection to provide the MMs’ risk-free facilitation of large-volume trades of SPY ordered by institutions managing multi-billion $ investment portfolios.
The small lower picture of Figure 3 shows the count of RIs at all levels in each of the past 5 years 1261 market days, with today’s count of only 8 at the 23 RI level. If the past is to be repeated, higher prices appear likely to be dominant.
As with any decisions made under uncertainty no guarantees can or should be made. The role of [H] in that consideration becomes clearer as [R] is compared. Once Win odds drop much below 80 the likelihood of forecast satisfaction tends to disappear. This analysis does what “technical investing analysis” seems to never consider – any historical verification of the aged mythology it regularly offers as examples of “occasionally what has happened.”
The difference of using informed forecasts as a basis for projections instead of simply using raw past price experiences also contributes significantly to the odds for success. Here in Figure 4 is the WSM history in parallel to the SPY experience. It provides a current RI of 17, meaning the upside price change prospect is about five times as big a gain potential as a likely loss.
Recent Trends in Price Range Forecasts for WSM
(Used with permission)
It turns out that in WSM’s prior forecast experience there had been 56 market days when a RI of 17 was seen, and in all 56 the standard portfolio management of TERMD result was profitable at a +15.4% average, requiring a holding period time investment of 41 days.
It is the availability of a varied balance between upside and downside prospects, determined in a rational, consistent way which makes the MMs’ forecasts superior to other, typically single-target-point investment forecasts. Those balances become the way to evaluate the effectiveness of forecasts at different levels of the Reward-to-Risk tradeoffs, an evaluation rarely offered with most other-source forecasts.
Referring back to Figure 2, the [R] results of WSM prior forecasts were far better than those of any of the other dozen or more investment alternatives.
The troubling Outlooks of AMZN, TGT, CDW
We will, as earlier suggested, provide separate reviews of these stocks, referring back to data and notions discussed in this retailing sector review.
The comparisons of current Reward~Risk forecast histories of this leading retailer should make clear for investors seeking near-term capital gains the dominant attractiveness of owning Williams-Sonoma at this point in time. No guarantees, just excellent odds for continued substantial rate of gain.