Yearly Archives: 2021

Onward and Upward

The market is always forward-looking, said the pundit.

courtesy Cnet.

We were driving back from Steamboat to Denver and listening to satellite radio.  It was noon coming through Kremmling in Grand County and the temperature was five degrees Fahrenheit, 50 degrees chillier than Denver.

And I thought, “Do these people pay attention?”

I like traditions.  Thanksgiving.  Anniversaries.  Hieratic observances that remind us there are bigger things than ourselves.  Skiing before the riff-raff gets to the slopes.  Reading Federalist 41 periodically and then looking at our government and laughing.

But clinging to traditions like sell in May and go away and the market is always forward-looking while ignoring the geological upheaval in market form and function the past 15 years is inexcusable.

How can you say the market is always forward-looking when Citadel Securities is its largest volume-driver and its investment horizon is a day or less?  Over 52% of all trading volume has an investment horizon of a day or less. It’s machines changing prices and profiting by sitting in the middle.

If you wonder if that pays, have a look at the stuff Ken Griffin owns.  And Doug Cifu. And Vinnie Viola.  Ed Bosarge (that’s quite entertaining, no offense to this innovative high-frequency trader).

The market cannot be forward-looking if the majority of its volume is living in the moment. The market then lives in the moment.

Do you follow?

It’s not just wrong to cast the market as a forward-looking.  It’s dangerous.  Take Transports, a classic subdivision of the stock market long used as a barometer of commerce. They’re trading at all-time highs. The thinking is a strong Transports group predicts economic prosperity.  After all, it’s the machinery and apparatus of the movement of goods.

And how about retail stocks?  I was just saying to the folks at EDGE, the decision-support platform built on market structure that we founded to help mom and pop traders out-think the machines, that retailers looked best.

That’s not because we examined all the data on spending patterns in the USA or concluded that folks would plow their latest Covid cash from the government into garments and furniture.  No, it’s math. The short volume trend was down, and the ramp in Sentiment was the best of any sector or industry.

Son of a gun.  Look at Overstock, Wayfair, pick your component.

But supposing that it’s anything other than math is supposing amiss.  You can no more look at the market and draw a reliable economic conclusion than you can look at a forked stick and hope it leads you to water.

Unless you’ve been touched by the spirit, I suppose.

You get the point.

Transports?  Sure, the stay-at-home pandemic culture enriched distribution channels like trucking and rails.  AMZN isn’t a component of the Dow Jones Transportation Index (DJT).  But a bunch of airlines and a rental-car company are.

You can try like all the pundits to come up with a rational reason for why the future is brighter than ever for Transports. And you can always find one.

That doesn’t make it so.  The reason Transports are up is because they’re volatile. You can make a crap ton – to use an elegant Latin term – trading volatility in the moment.

Speaking of volatile, so is the outlook for Activism in 2021.  It may be INTC is a harbinger of things to come.

If you want to know what that data looks like and how you can see it coming in your own trading, I’ll show you at the NIRI Twin Cities program this Thursday at 11a CT. I’m moderating a discussion on the data, the preparation and the battle – and why 2021 might bring the Viking raiders back ambuscading our ranks.

Back to the present.  I’ve said it before. There are facts apparent to any observer about the stock market.  More assets are passive now than Active.  Citadel Securities dominates.  Options trading is at records.  Volatile is a plague. Short volume is nearly half the total.

When is our profession, the investor-relations discipline, going to adapt? Are these facts part of your regular communication to your boards and executive teams?  If not, why not? If you’re ready, we’ve got the orbit, the data, the tools and the structure to help you keep your relevance in a right-now market. Have for 16 straight, unrelenting years.

The world moves on. We must too. We can’t be the last people on the planet to catch up.  Now if you’ll excuse me, there are three planets upward in the sky I want to see (Jupiter, Saturn, Mercury, this week),  moving onward, like time and the stock market.

Last Year’s Language

Happy New Year!

Last year’s words belong to last year’s language and next year’s words await another voice.

TS Eliot said that. If you need a break from the daily tempest, read my favorite of his, The Love Song of J Alfred Prufrock.

So often what is said of the machinery of the stock market reminds me of a line from it.  In a minute there is time for decisions and revisions which a minute will reverse.

Against that poetic backdrop, let’s review the math of the stock market and look ahead at what it may this time bring.

Stocks were up. Simple math.  Like the $7.4 trillion now on the Federal Reserve’s balance sheet, representing the spread between what we had before and what we next needed. The market valued that intervention more than real production.

Ponder that. Read some TS Eliot.  If you’ve wondered what Modern Monetary Theory is, this is it.  If economic activity decreases, the government manufactures offsetting money to get the collective back to level.

So last year’s language says we can survive a long-term economic idling. But next year’s words subsequently speak of the ebbing value of money and work and time.  Repeated, it will lead to societal collapse because we cannot pay out money without getting something – stocked shelves, harvested crops, cut hair, worked biceps – in return.

Thomas Jefferson said in a 1790 letter to William Carmichael, “The right to use a thing comprehends a right to the means necessary to its use, and without which it would be useless.”

Next year’s words come from a past voice. If governments insist they can shutter the economy, people lose the most foundational right of all: Independent survival through freedom and initiative.  It transcends government and squats at the base of Maslow’s Hierarchy beside food, clothing and shelter, which shouldn’t depend on another’s edict.

The Hegelian Dialectic – the tension of competing ideas – has become stretched cultural rawhide. Yet the stock market merrily courted 50 million online brokerage accounts and a sort of Bacchanal befitting an F Scott Fitzgerald novel.  Party time!

Let’s go, however, to the math.  The graph here compares a number of the core ModernIR quantitative measures of market behavior central to our intellectual property, Market Structure Analytics for stocks comprising the S&P 500.

By the end of 2020, Active Investment – classic stock-picking, the money motivated by long-term financial performance – was down almost 32% year-over-year as a share of trading volume and totaled less than 10% of the total, a historical low.

What prices the market is what transacts in it.  Not who owns the stocks.  It’s the same as a neighborhood. What prices it isn’t who lives there but what’s paid for what sells.

Even Passive Investment was down about 14% year-over-year.  The big surge driving the stock market to all-time highs as the whole globe dove under gargantuan piles of face masks was Fast Trading and Risk Mgmt.  The former is speculation. The latter is using derivatives in place of stocks.  These behaviors are dominated by firms like Citadel Securities, which buys a bulk of all retail trades from those online accounts, and Wolverine Trading, a low-latency firm focused on automating trade-hedges.

It’s not Warren Buffett and Boston-area portfolio managers.  That was yesterday’s language.

It’s worth noting that volatility was up 44%. Short volume at 43% of all trading volume was almost unchanged from the end of 2019.

What did you think drove stocks in 2020? If you watched CNBC like we all do in investor-relations and investing, it was the work-from-home trade, the future of electric vehicles, the horse race in Covid-19 vaccines.

People and machines speculated on those, yes. But you can’t call 2020 an investment market.  It was one of the great speculative soirees in human history. A romp through Dutch tulips (I’ll let you hunt that one down).

So, what’s it mean for 2021?   I’m reminded of another snippet of Thomas Jefferson’s, who observed via letter,  rather than Facebook post, to William Barry, later Andrew Jackson’s Postmaster General, that, paraphrasing, an extensive, corrupt, and indifferent regime would be met by reformation or revolution, the one or the other.

The stock market’s behaviors are extensive and indifferent and have corrupted its purpose.  What follows if people care is reform or revolt.  Both are opportunities, not obstacles.

The revolutionary opportunity for companies and investors is to see the market just as we presented it here. And there’s reform coming to rules and data.  More on that as 2021 unfolds.

Last year’s market language bred 2021 with generational speculative risk.  That doesn’t mean we’ll be measuring our lives out with coffee spoons (see TS Eliot). We have sure heaped a load on ourselves, though, as a new decade begins.

We’re not worried. We’re watchful. Now, if you’ll excuse me, I’ve got some things to read.