Fade the Move

Have you seen that car commercial with the bearded guy?

The car chimes when you should check the tires. To drive the point home, as it were, we viewers see our bearded fellow getting hired and, as the new boss extends a hand, going overboard with the handshake – until he hears the chime. Then he’s readying with cologne for a date and when he’s about to squirt a supply netherward, the chime stops him. He’s going in for a goodnight kiss with overmuch gusto. Chime.

The chime says fade the move.

Fading the move would be a great name for a rock band. It’s a currency-trading term that means “when your dough moves sharply, be ready for a shift back and re-weight accordingly.”

It caught my eye Tuesday early when faulty Spanish bond data caused a sharp shudder in the euro, which dropped like a stone, juicing the dollar. Adam Cole, currency analyst at RBC quoted in a Marketwatch blog, said that absent a better explanation, “We would suggest fading the move.”

Fading the move abounds in your stock. You announce a big contract win that should add something to multiples of forward cash flow, and in your trading data, speculators are fading the move.

Why? How’d the euro – a global currency second only to the dollar! – juke on jived Spanish bond data? Machines.

Computers consume data. Computers read headlines. Computers compare share-prices and price-moves and spreads versus this index or that ETF. We wrote years ago that DE Shaw runs dihedral quantitative portfolios looking for up-tipped wings on a broad plane of securities – dihedral formations.

Fading the move is a big reason why intraday volatility – the daily spread between highest and lowest price – is over 2%. Money fades the move before 4p. It fades the move Fridays and holidays and around options expirations (next week as earnings season hits stride). The Dow Industrials are up 10% this year. That’s five days of intraday trading, or ten if you try to fade every move halfway. Why hold’em weeks or months?

Lesson, IROs: You’ll want to know when money is holding ‘em or fading ‘em so you don’t construe big moves up or down with rational thought. Most market-structure graphs today resemble seismic readouts, because institutions of all shades fade the move.

That tells us two things: Great IR has never been more important for separating fading and moving. Today’s IRO knows the story, and knows the structure. And second, markets are balanced on a rail. Waiting for the chime.