QuantDesk® Machine Learning Forecast
for the Week of August 8
The latest US jobs report, which indicated that 255K jobs were added during the month of July, has eased concerns of a US market getting ahead of itself. While year-over-year average earnings growth continues to decline (for the 4th year in a row) US stocks continue to rise to new highs. Many attribute the market rise primarily to the accommodative domestic and international monetary and fiscal policies. Whether politically motivated or not, market expectations are that the Fed will not raise interest rates before the November elections, a notion set to further advance the equity market, at least for a few more months.
The VIX dropped further to 11.39, inching closer to its 52-week lows. Traditionally, accommodative policy and a low interest environment have been highly correlated with low volatility and a steady rise in equity prices.
West Texas intermediate crude oil futures continue to hover along its three-month low closing the week slightly higher at $41.99 per barrel.
Image 1: USO Aug 1st to Aug 5th – Source: Google Finance
Past performance is not indicative of future returns.
Image 2: VIX Aug 1st to August 6th – Source: Google Finance
Past performance is not indicative of future returns.
Making The Case for Bristol-Myers Squibb (BMY)
On Friday, shares of the drug maker Bristol-Myers Squibb (BMY) fell 16% after its breakthrough non-small tumor cancer drug, Opdivo, failed to slow tumor growth in its late stage study of treating a wide sample of lung cancer patients. The news came as a surprise given previous studies which indicated excellent results on more targeted cases. The impact on BMY’s stock was severe due to the fact that lung cancer is still considered one of the leading causes of death in the US and Opdivo was viewed as the modern immunotherapy blockbuster miracle drug. Opdivo was projected to be the dominant player in this $12B market.
Image 3: BMY Aug 1st to August 6th – Source: Google Finance
Past performance is not indicative of future returns.
With an approximate $20B market cap loss one could wonder if panic selling penalized BMY excessively, and whether this recent price drop represents a unique buying opportunity. Fundamentally, BMY’s business is still strong. Last year’s sales (before Opdivo’s projected income) was reported at $16B with a healthy profit margin of 16.29% and trailing twelve months operating margins of 27.27%. In addition, Opdivo is sold effectively for other forms of cancer and is already estimated to profit BMY by $900M this year. In addition, Opdivo’s study can be repositioned to more narrow lung cancer cases in which it has been proven effective. Lastly, Opdivo can still be sold internationally which will undoubtedly benefit BMY’s 2016 performance.
In addition to the fundamental analysis, I wanted to overlay a statistical assessment of large medical players suffering similar drastic price drops. I used QuantDesk® Event Analyzer to construct a study by which we can statistically evaluate large cap healthcare businesses in the S&P since 2010. Specifically, we are looking to statistically assess the price recovery of companies suffering a price drop of more than 10% in a single day.
Image 4: QuantDesk® event study assessing healthcare companies in the S&P with price drop
of -10% to -20% in a single day since 2010.
This time, I wanted to run two analyses:
- A short term price recovery assessment of 1 month after the price drop.
- A longer term price recovery assessment of 1 year after the price drop.
Image 5: QuantDesk® event study result with a 21-day outlook assessment.
In the above chart, the vertical line above zero represents the date in which the 10% or more price drop occurred. (See how the chart to the left of the vertical line takes a dive.) On the right of the vertical line we can assess the standard deviation of the price action after the event occurred. The mean line represents a relatively modest average recovery of approximately 2%. It’s interesting to note that in cases where the stocks experience multiple price drop events of more than 10%, the statistics turn unfavorable. For example, notice ENDP, which suffered similar price drops six times during the same period. The ENDP stock price plunged from $83.43 to $18.07 in the past 12 months.
When assessing the same companies up to a 1-year post event date, the picture gets a lot clearer.
Image 6: QuantDesk® Event Study result with a 252-day outlook assessment.
The vertical line above zero still represents the date in which the 10% or more price drop occurred. However, it is evident that in more than 80% of the cases we see a clear price recovery of 10% or more after eight months and further an approximate 30% adjusted price increase (including dividend payout) one year later.
Many fundamental money managers are starting to apply quantitative research as an overlay to their existing research routine. Technical research in these cases is used primarily to validate or refute a fundamental assessment. Naturally, when both fundamental and technical assessments agree, the likelihood of success grows. It is important to note, however, that Lucena’s technology integrates fundamental, technical and other quantitative measures into a single comprehensive research platform.
The table below delineates a trailing 12-month performance and a YTD comparison between the two model strategies we cover in this newsletter (BlackDog and Tiebreaker), as well as the two ETFs representing the major US indexes (the DOW and the S&P).
Image 7: Last week’s changes, trailing 12 months, and year-to-date gains/losses.
Past performance is no guarantee of future returns.
Model Tiebreaker: Lucena’s Active Long/Short US Equities Strategy:
Tiebreaker: Paper trading model portfolio performance compared to the SPY and Vanguard Market Neutral Fund from 9/1/2014 to 8/5/2016.
Past performance is no guarantee of future returns.
Model BlackDog 2X, Lucena’s Tactical Asset Allocation Strategy:
BlackDog 2X: Paper trading model portfolio performance compared to the SPY and Vanguard Balanced Index Fund from 4/1/2014 to 8/5/2016.
Past performance is no guarantee of future returns.
Appendix
For those of you unfamiliar with BlackDog and Tiebreaker, here is a brief overview: BlackDog and Tiebreaker are two out of an assortment of model strategies that we offer our clients. Our team of quants is constantly on the hunt for innovative investment ideas. Lucena’s model portfolios are a byproduct of some of our best research, packaged into consumable model-portfolios. The performance stats and charts presented here are a reflection of paper traded portfolios on our platform, QuantDesk®. Actual performance of our clients’ portfolios may vary as it is subject to slippage and the manager’s discretionary implementation. We will be happy to facilitate an introduction with one of our clients for those of you interested in reviewing live brokerage accounts that track our model portfolios.
Tiebreaker:
Tiebreaker is an actively managed long/short equity strategy. It invests in equities from the S&P 500 and Russell 1000 and is rebalanced weekly using Lucena’s Forecaster, Optimizer and Hedger. Tiebreaker splits its cash evenly between its core and hedge holdings, and its hedge positions consist of long and short equities. Tiebreaker has been able to avoid major market drawdowns while still taking full advantage of subsequent run-ups. Tiebreaker is able to adjust its long/short exposure based on idiosyncratic volatility and risk. Lucena’s Hedge Finder is primarily responsible for driving this long/short exposure tilt.
Tiebreaker Live Interactive Brokers Portfolio Performance
Live performance reports are taken from an interactive brokers account which attempts to follow Tiebreaker’s model closely with the following potential differences:
- Transactions Fees - Performance is net of transactions fees.
- Management Fees - Performance is net of management fees.
- Manager’s discretion – Manager can use own discretion as to final trade executions. For example, employing VWAP (volume weighted average price) and/or manually monitoring exit during stop loss and target gain.
- Hard to borrow and restricted stocks - Hard to borrow, and restricted stocks may be substituted with highly correlated alternatives.
- Dividends, interest or any other credits are reinvested.
- Slippage - Depending liquidity, large block purchases could impact certain stock prices unfavorably.
Tiebreaker Model Portfolio Performance Calculation Methodology
Tiebreaker’s model portfolio’s performance is a paper trading simulation and it assumes opening account balance of $1,000,000 cash. Tiebreaker started to paper trade on April 28, 2014 as a cash neutral and Bata neutral strategy. However, it was substantially modified to its current dynamic mode on 9/1/2014. Trade execution and return figures assume positions are opened at the 11:00AM EST price quoted by the primary exchange on which the security is traded and unless a stop is triggered, the positions are closed at the 4:00PM EST price quoted by the primary exchange on which the security is traded. In the case of a stop loss, a trailing 5% stop loss is imposed and is measured from the intra-week high (in the case of longs) and low (in the case of shorts). If the stop loss was triggered, an exit from the position 5% below, in the case of longs, and 5% above, in the case of shorts. Tiebreaker assesses the price at which the position is exited with the following modification: prior to March 1st, 2016, at times but not at all times, if, in consultation with a client executing the strategy, it is found that the client received a less favorable price in closing out a position when a stop loss is triggered, the less favorable price is used in determining the exit price. Since March 1st, 2016, all trades are conducted automatically with no modifications based on the guidelines outlined herein. No manual modifications have been made to the gain stop prices. In instances where a position gaps through the trigger price, the initial open gapped trading price is utilized. Transaction costs are calculated as the larger of 6.95 per trade or $0.0035 * number of shares trades.
BlackDog:
BlackDog is a paper trading simulation of a tactical asset allocation strategy that utilizes highly liquid ETFs of large cap and fixed income instruments. The portfolio is adjusted approximately once per month based on Lucena’s Optimizer in conjunction with Lucena’s macroeconomic ensemble voting model. Due to BlackDog’s low volatility (half the market in backtesting) we leveraged it 2X. By exposing twice its original cash assets, we take full advantage of its potential returns while maintaining market-relative low volatility and risk. As evidenced by the chart below, BlackDog 2X is substantially ahead of its benchmark (S&P 500).
In the past year, we covered QuantDesk’s Forecaster, Back-tester, Optimizer, Hedger and our Event Study. In future briefings, we will keep you up-to-date on how our live portfolios are executing. We will also showcase new technologies and capabilities that we intend to deploy and make available through our premium strategies and QuantDesk® our flagship cloud-based software.
My hope is that those of you who will be following us closely will gain a good understanding of Machine Learning techniques in statistical forecasting and will gain expertise in our suite of offerings and services.
Specifically:
- Forecaster - Pattern recognition price prediction
- Optimizer - Portfolio allocation based on risk profile
- Hedger - Hedge positions to reduce volatility and maximize risk adjusted return
- Event Analyzer - Identify predictable behavior following a meaningful event
- Back Tester - Assess an investment strategy through a historical test drive before risking capital
Your comments and questions are important to us and help to drive the content of this weekly briefing. I encourage you to continue to send us your feedback, your portfolios for analysis, or any questions you wish for us to showcase in future briefings.
Send your emails to: [email protected] and we will do our best to address each email received.
Please remember: This sample portfolio and the content delivered in this newsletter are for educational purposes only and NOT as the basis for one’s investment strategy. Beyond discounting market impact and not counting transaction costs, there are additional factors that can impact success. Hence, additional professional due diligence and investors’ insights should be considered prior to risking capital.
For those of you who are interested in the spreadsheet with all historical forecasts and results, please email me directly and I will gladly send you the data.
If you have any questions or comments on the above, feel free to contact me: [email protected]
Have a great week!
Lucena Research brings elite technology to hedge funds, investment professionals and wealth advisors. Our Artificial Intelligence decision support technology enables investment professionals to find market opportunities and to reduce risk in their portfolio.
We employ Machine Learning technology to help our customers exploit market opportunities with precision and scientifically validate their investment strategies before risking capital.
Disclaimer Pertaining to Content Delivered & Investment Advice
This information has been prepared by Lucena Research Inc. and is intended for informational purposes only. This information should not be construed as investment, legal and/or tax advice. Additionally, this content is not intended as an offer to sell or a solicitation of any investment product or service.
Please note: Lucena is a technology company and not a certified investment advisor. Do not take the opinions expressed explicitly or implicitly in this communication as investment advice. The opinions expressed are of the author and are based on statistical forecasting based on historical data analysis. Past performance does not guarantee future success. In addition, the assumptions and the historical data based on which an opinion is made could be faulty. All results and analyses expressed are hypothetical and are NOT guaranteed. All Trading involves substantial risk. Leverage Trading has large potential reward but also large potential risk. Never trade with money you cannot afford to lose. If you are neither a registered nor a certified investment professional this information is not intended for you. Please consult a registered or a certified investment advisor before risking any capital.