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Summary From a population of some 350 actively-traded, substantial, and growing ETFs, this is a currently attractive addition to a portfolio whose principal objective is wealth accumulation by active investing. We daily evaluate future near-term price gain prospects for quality, market-seasoned ETFs, based on the expectations of market-makers [MMs], drawing on their insights from client order flows. The analysis of our subject ETF’s price prospects is reinforced by parallel MM forecasts for each of the fund’s ten largest holdings. Qualitative appraisals of the forecasts are derived from how well the MMs have foreseen subsequent price behaviors following prior forecasts similar to today’s. The size of prospective gains, the odds of winning transactions, worst-case price drawdowns, and marketability measures are all taken into account. Today’s most attractive ETF… … is the Direxion Daily Healthcare Bull 3X ETF (NYSEARCA: CURE ). The investment seeks daily investment results, before fees and expenses, of 300% of the performance of the Health Care Select Sector Index. The fund creates long positions by investing at least 80% of its assets in the securities that comprise the Health Care Select Sector Index and/or financial instruments that provide leveraged and unleveraged exposure to the index. These financial instruments include: futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds, etc. It is non-diversified. (Source: Yahoo Finance ) The fund currently holds assets of $351 million and has had a YTD price return of +3.95%. Its average daily trading volume of 520,259 produces a complete asset turnover calculation in 21 days at its current price of $31.71. Behavioral analysis of market-maker hedging actions while providing market liquidity for volume block trades in the ETF by interested major investment funds has produced the recent past (6-month) daily history of implied price range forecasts pictured in Figure 1. Figure 1 (used with permission) The vertical lines of Figure 1 are a visual history of forward-looking expectations of coming prices for the subject ETF. They are NOT a backward-in-time look at actual daily price ranges, but the heavy dot in each range is the ending market quote of the day the forecast was made. What is important in the picture is the balance of upside prospects in comparison to downside concerns. That ratio is expressed in the Range Index [RI], whose number tells what percentage of the whole range lies below the then current price. Today’s Range Index is used to evaluate how well prior forecasts of similar RIs for this ETF have previously worked out. The size of that historical sample is given near the right-hand end of the data line below the picture. The current RI’s size in relation to all available RIs of the past 5 years is indicated in the small blue thumbnail distribution at the bottom of Figure 1. The first items in the data line are current information: the current high and low of the forecast range, and the percent change from the market quote to the top of the range, as a sell target. The Range Index is of the current forecast. Other items of data are all derived from the history of prior forecasts. They stem from applying a T ime- E fficient R isk M anagement D iscipline to hypothetical holdings initiated by the MM forecasts. That discipline requires a next-day closing price cost position be held no longer than 63 market days (3 months), unless first encountered by a market close equal to or above the sell target. The net payoffs are the cumulative average simple percent gains of all such forecast positions, including losses. Days held are average market rather than calendar days held in the sample positions. Drawdown exposure indicates the typical worst-case price experience during those holding periods. Win odds tells what percentage proportion of the sample recovered from the drawdowns to produce a gain. The cred(ibility) ratio compares the sell target prospect with the historical net payoff experiences. Figure 2 provides a longer-time perspective by drawing a once-a week look from the Figure 1 source forecasts, back over two years. Figure 2 (used with permission) What does this ETF hold, causing such price expectations? Figure 3 is a table of securities held by the subject ETF, indicating the manner in which a 3X leverage on the healthcare index is accomplished. The ETF’s ratios of current market price to various accounting measures are also shown. Figure 3 (Source: Yahoo Finance) Since the value of the index being leverage-tracked is driven by the intermediate unleveraged ETF, the Health Care Select Sector SPDR ETF (NYSEARCA: XLV ), it is useful to know the concentration of its top ten largest holdings and their percentage of XLV’s total value: Figure 4 (click to enlarge) (Source: Yahoo Finance) XLV concentrates 53% of its assets in its top ten commitments. This provides a responsive measure of the action of market prices of stocks in this essential sector. The major holdings are all established, dominant participants in the healthcare industry. Figure 5 is a table of data lines similar to that contained in Figure 1 for each of the top ten holdings of XLV, plus, for convenience, the XLV and CURE data itself. Figure 5 (click to enlarge) (Source: Peter Way Associates, blockdesk.com) Column (5) contains the upside price change forecasts between current market prices (4) and the upper limit of prices (2) regarded by MMs as being worth paying for price change protection. The average of +7.2% of the top ten XLV holdings is well above the market-average proxy SPDR S&P 500 Trust ETF’s (NYSEARCA: SPY ) +5.3%. Diversification of XLV’s other 47% of holdings damps its overall upside (as MMs see it) to only +5.3%. But in the same stroke, the risk side of the equation in (6) for XLV is brought down to worst-case price drawdowns of -3.2%, below the defensive SPY norm of -3.6%. In an environment many consider imbued with high market risk, XLV may provide a very attractive balance. The ability of XLV holdings to recover from those worst-case drawdowns and achieve profits (8) was shown in 85% of experiences. The equity population only recovered less than two-thirds of the time, and while the SPY experiences were more consistent, the achieved gains were much smaller. SPY has had only +3.1% gains previously from like forecasts of +9.4%. CURE provides an exciting history of price gains derived from the XLV experiences at times (like now) dictated by the MMs expectations for it, as measured by its current Range Index of 18. Each of the rows of data in Figure 5 is a sample of prior forecasts at the same level of RI as today’s in column (7). XLV has a RI of 42, while CURE, because of its leverage, is at a much more extreme low RI level. Instead of having about one and a half times as much upside, it is seen to have nearly triple. The win odds (8) for CURE need to be taken as perhaps a function of their small proportion of the available forecasts (16). But in every prior case, they have been profitable. And the typical holding periods of about two weeks are remarkable. Their size of +12% gains are quite competitive with the 20 best alternatives in the whole population, even should it take seven weeks to achieve. Conclusion CURE provides attractive forecast price gains, supported by its equally appealing largest underlying holdings and 3X operating or structural leverage. Both the ETF and many of its major holdings offer very attractive prospects in near-term price behaviors, demonstrated by previous experiences following prior similar forecasts by market-makers. But it may be considered a defensive commitment in the face of widespread anticipation of further market weakness. The blue summary row of Figure 5 labeled 20 Best-Odds Forecast Price Ranges tells what the current top-ranked wealth-building opportunities are offering, as a comparative competitive norm. YTD in 2015, 2200 of these 20-a-day list members have reached closeouts in an average of 2-month holding periods, providing an annual rate of average price change gains +24% better than SPY. CURE seems to provide an even more superior opportunity. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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. Scalper1 News
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