Market-makers [MM] every day are called on to balance buyers and sellers’ share volumes in transactions. For typical small, regularly appearing individual investor trades, no problem. Markets are automated to quickly adapt from electronic “offer books” with little to no help.
But when systems are surprised by irregularly-appearing, huge volume transaction orders from “institutions” adjusting billion-$ portfolios, they choke, needing MM help to get in balance. Where sufficient protection from subsequent price change in a subject stock can be found at a reasonable cost, then MMs will borrow shares lent (usually by other institutions for a fee) to be delivered to the buy-side of the big trade order.
The structure and prices of the derivative-securities’ contracts providing the underlier-stock price-change protection reveal the MM-community and institution expectations of the stock’s higher and lower price limits. Those limits define price risk and rewards seen in the next few months for the subject stock, making comparisons of investment prospects between similar alternatives in the next few months viable.
This article compares the prospects for Zumiez Inc. (NASDAQ:ZUMZ) with other apparel stock alternative investments, and equity market indexes.
Description of Subject Company
“Zumiez Inc., together with its subsidiaries, operates as a specialty retailer of apparel, footwear, accessories, and hardgoods for young men and women. Its hardgoods include skateboards, snowboards, bindings, components, and other equipment. As of February 26, 2022, the company operated 738 stores, including 602 stores in the United States, 52 stores in Canada, 67 stores in Europe, and 17 stores in Australia under the names of Zumiez, Blue Tomato, and Fast Times. The company also operates zumiez.com, zumiez.ca, blue-tomato.com, and fasttimes.com.au e-commerce websites. Zumiez Inc. was founded in 1978 and is headquartered in Lynnwood, Washington.”
Source: Yahoo Finance
Reward~Risk Comparison with Alternatives
(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 intersection of those coordinates by the numbered positions is identified by the stock symbols in the blue field to the right.
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.
Our principal interest is in ZUMZ at location . A “market index” norm of reward~risk tradeoffs is offered by SPDR S&P500 index ETF at .
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. The protective actions taken with real-money bets 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 Investment Details
(used with permission)
Column headers for Figure 2 define elements for each row stock whose symbol appears at the left in column [A]. The elements are derived or calculated separately for each stock, based on the specifics of its situation and current-day MM price-range forecasts. Data in red numerics are negative, usual undesirable to “long” holding positions. Table cells with yellow background “fills” are of data for the stock of principal interest and of all issues at the ranking column, [R].
Readers familiar with our analysis methods may wish to skip to the next section viewing price range forecast trends for ZUMZ.
Figure 2’s purpose is to attempt universally comparable answers, stock by stock, of a) How BIG the price gain payoff may be, b) how LIKELY the payoff will be a profitable experience, c) how soon it may happen, and d) what price drawdown RISK may be encountered during its holding period.
The price-range forecast limits of columns [B] and [C] get defined by MM hedging actions to protect firm capital required to be put at risk of price changes from volume trade orders placed by big-$ “institutional” clients.
[E] measures potential upside risks for MM short positions created to fill such orders, and reward potentials for the buy-side positions so created. Prior forecasts like the present provide a history of relevant price draw-down risks for buyers. The most severe ones actually encountered are in [F], during holding periods in effort to reach [E] gains. Those are where buyers are most likely to accept losses.
[H] tells what proportion of the [L] sample of prior like forecasts have earned gains by either having price reach its [B] target or be above its [D] entry cost at the end of a 3-month max-patience holding period limit. [ I ] gives the net gains-losses of those [L] experiences and [N] suggests how credible [E] may be compared to [ I ].
Further Reward~Risk tradeoffs involve using the [H] odds for gains with the 100 – H loss odds as weights for N-conditioned [E] and for [F], for a combined-return score [Q]. The typical position holding period [J] on [Q] provides a figure of merit [fom] ranking measure [R] useful in portfolio position preferencing. Figure 2 is row-ranked on [R] among candidate securities, with ZUMZ in top rank.
Along with the candidate-specific stocks these selection considerations are provided for the averages of nearly 3200 stocks for which MM price-range forecasts are available today, and 20 of the best-ranked (by fom) of those forecasts, as well as the forecast for S&P500 Index ETF (NYSEARCA:SPY) as an equity market proxy.
The present uncertainties in the equities market at large are seen in the [T] column of the SPY row, its background shaded in pink where the Reward~Risk tradeoff of SPY’s columns [E] and [F] are +11% and -10%, an unusually high level of price drawdown exposure for the broad market index. SPY’s Sample Size of 11 (out of 1,261 market days of the past 5 years) tells how unusual is today’s Range Index of 24, uncharacteristically low. The high level of world uncertainty from Russia’s invasion of Ukraine is likely the cause. In Figure 1 SPY at  is located up close to the diagonal, instead of being down usually around where LULU is at .
Recent Trends in MM Price-Range Forecasts for ZUMZ
(used with permission)
This picture is not a “technical chart” of past prices for ZUMZ. Instead, it is the past 6 months of daily price range forecasts of market actions yet to come in the next few months. The only past information there is the closing stock price on the day of each forecast.
That data splits the price range’s opposite forecasts into upside and downside prospects. Their trends over time provide additional insights into coming potentials, and helps keep perspective on what may be coming.
The small picture at the bottom of Figure 3 is a frequency distribution of the Range Index’s appearance daily during the past 5 years of daily forecasts. The Range Index [RI] tells how much the downside of the forecast range occupies of that percentage of the entire range each day, and its frequency suggests what may seem “normal” for that stock, in the expectations of its evaluators’ eyes.
Here the present level is near its least frequent, lowest-cost presence, encouraging the acceptance that we are looking at a realistic evaluation for ZUMZ. With many past RIs above the present RI than below there is more room for an even more positive outlook.
Investment Candidates’ Prior Profitability Prospects
(used with permission)
This comparison map uses an orientation similar to that of Figure 1, where the more desirable locations are down and to the right. Instead of just price direction, the questions are more qualitative: “how big” and “how likely” are price change expectations now?
Our primary interest is in ZUMZ’s qualitative performance, particularly relative to alternative investment candidate choices. Here ZUMZ is at location , the intersection of horizontal and vertical scales of +22% gain and +88% assurance (odds of a “win”).
As a market norm, SPY is at location  with a +7% payoff and an 82% assurance of profitability. ZUMZ tends to dominate all the others in this comparison.
Among these alternative investments explicitly compared Zumiez Inc. appears to be a logical buy preference now for investors seeking near-term capital gain.