• Precision Alpha measures the energy created by buyers and sellers.
• In January Market Power was driving QQQ higher yet Market Resistance and Market Noise were also rising rapidly.
• QQQ, like a spring stretched to its limit, was poised to fall, COVID-19 simply triggered the spring more rapidly than normal, creating a windfall for our clients.
Some of our clients bought puts on January 9, 2020, with a strike of 190 on QQQ based on Precision Alpha. Precision Alpha does not have a crystal ball and no one anticipated the economic impact of COVID-19, but our signals allowed our clients to protect their portfolios nonetheless. This is a good example of how Precision Alpha delivers Alpha.
In January, the Next Day Probability for QQQ was bullish and Market Power was rising. A continued rise in QQQ was well supported and QQQ did rise over the next month. So why buy puts?
First of all, any measure of Market Power above Zero is moving away from equilibrium, bullish or bearish. Market Power is a true scientific measure that captures the energy created by buyers and sellers with respect to any security. Securities ultimately always move back toward equilibrium. Some of our clients, for example, choose securities at equilibrium and sell short-dated covered calls in between earnings dates when the news cycle is light and collect the premium, which, when repeated, generates substantial returns.
In the case of QQQ on January 9, Precision Alpha’s measures of Market Resistance and Market Noise were also rising rapidly. Market Resistance impedes the ability of Market Power to drive the price of a security higher. Market Noise reduces the efficiency of Market Power’s ability to drive a security higher. Clearly, on January 9, it was becoming more and more difficult for Market Power to drive QQQ higher.
What you will observe –consistently (because Precision Alpha’s measures are scientific and precise) – is that eventually Market Resistance and Market Noise reduce Market Power and the security finds a new equilibrium. QQQ was poised for such an adjustment – a fall – on January 9 and increasingly over the following 30 days.
The beauty of Precision Alpha is that Market Power will often fall, sometimes dramatically, before the price of a security adjusts upward or downward to the new equilibrium. Sometimes Market Power moves a day or a few days before the price of the security moves and sometimes 20 days, but these signals are often compelling – and profitable.
Our clients could have watched Market Power for QQQ closely, daily, but they knew that the turning point was close and decided to proactively hedge against a market downturn. With QQQ rising ever further away from equilibrium and Market Resistance and Market Noise increasing rapidly, Precision Alpha‘s measurements indicated that QQQ was like a spring ready to be catapulted downward.
Typically, this security price adjustment toward equilibrium is orderly. With advance notice, via Precision Alpha’s signals, these moves can be traded profitably; securities reach their new equilibrium and the process starts over again.
In this particular case, the adverse news of COVID-19 caused the spring to snap rapidly creating a windfall for our clients.