Tagged: AAPL

Power of Two

We’re coming to the end of two Coronavirus quarters. What happens now?

In a word, July.  As to what July brings, it’s summer in the northern hemisphere, winter down under.

It’s also the end of a remarkable period in stocks. I don’t mean rising or falling, volatility, the invincible-Alexander-the-Great-Macedonian-phalanx of the stock market (your history tidbit…you can look it up).

By “end” we don’t mean demise.  Though a demise is probably coming. More on that later. We mean the end of epic patterns.

We wrote last week about index-rebalances delayed since December.  In patterns observable through ModernIR behavioral analytics, the effort to complete them stretched unremitting from May 28 to June 18.

Yes, June 19 was a muscular volume day with quad-witching and we saw BIG Exchange Traded Fund (ETF) price-setting that day in many stocks. (Note: ETFs are substitutes for stocks that are easily traded but entitle owners to no underlying assets save the ETF shares.)

But the patterns strapping May to June like a Livestrong bracelet (wait, are those out?) ended almost everywhere June 18.  The effort reflected work by about $30 trillion, adding up money marked to MSCI, FTSE Russell and S&P Dow Jones, to match underlying construction.

Funds moved before rebalances. And the biggest components, ETF data indicate – really, they dwarf everything else – are AAPL and MSFT. Patterns show money piled like a rugby scrum into AAPL call options in early June, and then plowed headlong into AAPL equity between June 12-18.

It’s good business if you can get it, knowing the stock will inevitably rise because of its mass exposure to indexes and how its price then when last money square-danced into an Allemande Left with indexers in December 2019 was about $280.

How many of you remember when AAPL was down to about 5% of the computing market, most of that in academia, and it looked like MSFT would steamroll it right out of business?  And then MSFT was yesterday’s news, washed up, a boomer in a Slack world.

Today both say, Ha! Suckers!

MSFT patterns are like AAPL’s but less leveraged, explaining the divergence in performance over the past year. AAPL is up 84%, MSFT about half that.  You can see here how both have performed versus the Tech-heavy QQQ (Nasdaq 100 from Invesco) and the SPY, State Street’s proxy for the S&P 500.

AAPL and MSFT have pulled the market along like Charles Atlas (and his doppelganger) towing a Pennsylvania railcar (more arcane and anachronistic history for you).

That ended, at least for now.  The Russell reconstitution continues through Friday but in patterns at this point it appears money has already changed mounts, shifted chairs.

The marvel is the magnitude of the effects of these events, and the power of two – AAPL and MSFT.

You’re thinking, “What about the rest of the FAANGs?”

MSFT isn’t one but we include it, and oftentimes now TSLA and AMD.  FB, AMZN, NFLX, GOOG – incisors dripping less saliva than AAPL – are massive, yes. But they don’t pack the ETF power of the two.

Let me give you some data. There are 500 Financials stocks, about 400 Healthcare, around 300 Consumer Discretionary.  Tech is around 200.  Most of these sectors are Oversold, and there’s a lot of shorting. The FAANGs are Overbought and more than 50% short, collectively.

The few outweigh the many.

And meanwhile, Market Structure Sentiment™ is both bottomed and lacking the maw it signaled. Either we skip across the chasm for now, or it trips us soon (stocks love to render fools of soothsayers).

The salient point is that the market can’t be trusted to reflect views on Covid19, or trade with China, or the election in November, or economic data, or actions of the Federal Reserve (curiously the Fed’s balance sheet is tightening at the moment). It’s right now defined by the power of two.

Two legs.

We humans stand fine on two. Can the market?  We’re about to find out.  And the degree to which your shares are at risk, public companies, to those two legs, and your portfolio, investors, is measurable and quantifiable. Ask us, and we’ll show you.

Disruption

What did you say yesterday to your executive team, investor-relations officers, if you’d sent a note Monday about mounting Coronavirus fears?

The market zoomed back, cutting losses in the S&P 500 to about 2% since Jan 17.  We said here in the Market Structure Map Jan 22 that data on market hedges that expired Jan 17 suggested stocks could be down about 2% over the proceeding week.

It’s been a week and stocks were down 2%. (If you want to know what the data say now, you’ll have to use our analytics.)

The point is, data behind prices and volume are more predictive than headlines.

NIRI, the professional association for IR, last year convened a Think Tank to examine the road ahead, and the group offered what it called The Disruption Opportunity.

If we’re to become trusted advisors to executive teams and boards, it won’t be through setting more meetings with stock-pickers but by the strategic application of data.

For instance, if Passive investment powering your stock has fallen 30% over the past 200 trading days, your executive team should know and should understand the ramifications. How will IR respond? What’s controllable? What consequences should we expect?

At a minimum, every week the executive team should be receiving regular communication from IR disruptors, a nugget, a key conclusion, about core trends driving shareholder value that may have nothing to do with fundamentals.

Take AAPL, which reported solid results yesterday after the market closed.  AAPL is the second most widely held stock in Exchange Traded Funds (there’s a nugget).  It’s over 20% of the value of the Tech sector, which in turn is nearly 24% of the S&P 500, in turn 83% of market-capitalization.

AAPL is a big engine (which for you cyclists is American rider Tejay van Garderen’s nickname).  And it always mean-reverts.

It may take time. But it’s as reliable as Rocky Mountain seasons – because the market is powered today by money that reverts to the mean. Over 85% of S&P 500 volume is something other than stock-picking.

AAPL has the widest mean-reversion gap in a half-decade now, with Passive investment down a third in the last week.  AAPL trades over 30 million shares daily, about $10 billion of stock. And 55% of that – 17 million shares, $5.5 billion of dollar volume – is on borrowed shares.

Those factors don’t mean AAPL is entering a mean-reversion cycle. But should the executive team and the board know these facts?  Well, it sure seems so, right?

And investors, would it behoove you to know too?

The Russell 1000 is 95% of market cap, the Russell 3000, over 99.9%.  That means we all own the same stocks.  You won’t beat the market by owning stocks someone else doesn’t.

How then will you win?  I’m coming to that.

IR pros, you’re the liaison to Wall Street.  You need to know how the market works, not just what your company does that differs from another. If your story is as good as somebody else’s but your stock lags, rather than rooting through the financials for reasons, look at the money driving your equity value.

Take CRM. Salesforce is a great company but underperformed its industry and the S&P 500 much of the past year – till all at once in the new year it surged.

There’s no news.  But behaviors show what caused it.  ETF demand mushroomed. CRM is in over 200 ETFs, and the S&P 500.  For a period, ETFs could get cheap CRM stock to exchange into expensive SPY shares, an arbitrage trade.  The pattern is stark.

Now that trade is done. CRM market structure signals no imminent swoon but Passive demand is down over 20% because there’s no profit in the CRM-for-ETFs swap now.

That fact is more germane to CRM’s forward price-performance than its financials.

This, IR pros, is your disruption opportunity in the c-suite. If you’re interested in seeing your market structure, ask and we’ll give you a free report.

Investors, your disruption opportunity isn’t in what you own but when you buy or sell it. Supply and demand rule that nexus, and we can measure it.   If you’d like to know about Market Structure EDGE, ask us.

Jekyll and Hyde

Your stock may collateralize long and short Exchange-Traded Funds (ETFs) simultaneously.

Isn’t that cognitive dissonance – holding opposing views? Jekyll and Hyde? It’s akin to supposing that here in Denver you can drive I-25 north toward Fort Collins and arrive south in Castle Rock. Try as long as you like and it’ll never work.

I found an instance of this condition by accident. OXY, an energy company, is just through a contested battle with CVX to buy APC, a firm with big energy operations in the Permian Basin of TX (where the odor of oil and gas is the smell of money).

OXY is in 219 ETFs, a big number.  AAPL is in 271 but it’s got 20 times the market-capitalization.  OXY and its short volume have moved inversely – price down, shorting up. The patterns say ETFs are behind it.

So I checked.

Lo and behold, OXY is in a swath of funds like GUSH and DRIP that try to be two or three times better or worse than an index. These are leveraged funds.

How can a fund that wants to return, say, three times more than an S&P energy index use the same stock as one wanting to be three times worse than the index?

“Tim, maybe one fund sees OXY as a bullish stock, the other as bearish.”

Except these funds are passive vehicles, which means they don’t pick stocks. They track a model, and in this case, the same model.  If the stock doesn’t behave like the ETF, why does the fund hold it?

I should note before answering that GUSH and DRIP and similar ETFs are one-day investments. They’re in a way designed to promote ownership of volatility. They want you to buy and sell both every day.

You can see why. This image above shows OXY the last three months with GUSH and DRIP.

Consider what that means for you investor-relations professionals counting on shares to serve as a rational barometer, or you long investors doing your homework to find undervalued stocks.

Speaking of understanding, I’ll interject that if you’re not yet registered for the NIRI Annual Conference, do it now!  It’s a big show and a good one, and we’ve got awesome market structure discussions for you.

Back to the story, these leveraged instruments are no sideshow. In a market with 3,500 public companies and close to 9,000 securities, tallying all stock classes, closed-end funds and ETFs, some routinely are among the top 50 most actively traded.  SQQQ and TVIX, leveraged instruments, were in the top dozen at the Nasdaq yesterday.

For those juiced energy funds, OXY is just collateral. That is, it’s liquid ($600 million of stock trading daily) and currently 50% less volatile than the broad market. A volatility fund wants the opposite of what it’s selling (volatility) because it’s not investing in OXY. It’s leveraging OXY to buy or sell or short other things that feed volatility.

And it can short OXY as a hedge to boot.

All ETFs are derivatives, not just ones using derivatives to achieve their objectives. They are all predicated on an underlying asset yet aren’t the underlying asset.

It’s vital to understand what the money is doing because otherwise conclusions might be falsely premised. Maybe the Board at OXY concludes management is doing a poor job creating shareholder value when in reality it’s being merchandised by volatility traders.

Speaking of volatility, Market Structure Sentiment is about bottomed at the lowest level of 2019. It’s predictive so that still means stocks could swoon, but it also says risk will soon wane (briefly anyway). First though, volatility bets like the VIX and hundreds of billions of dollars of others expire today. Thursday will be reality for the first time since the 15th, before May expirations began.

Even with Sentiment bottoming, we keep the market at arm’s length because of its vast dependence on a delicate arbitrage balance. A Jekyll-Hyde line it rides.

Hedging Bets

We’re in Steamboat Springs this week watching the moose on the snowbanks and letting the world slow down with them for a bit. 

It sets me to thinking. “Hedge funds would be better off doing nothing.”  So postulated (requires subscription) Wall Street Journal writer Laurence Fletcher last week after data from Chicago hedge-fund researcher HFR Inc. showed stock-betting funds that as a group manage about $850 billion lost money in 2016. 

You’re tempted to smirk. The smartest folks in the room can’t beat an algorithm! They can’t top the S&P 500 index fund your 401k owns.  Losers!   

Let’s rethink that perspective.  These are the professional athletes of finance. The New England Patriots of investing. If the best are failing, the ones sorting good companies from bad and chasing them either direction, then maybe we’re missing the real problem. 

Perhaps it’s not that hedge funds are losing but that the market isn’t what it seems.

And if hedge funds are confusing busy with productive, might we be too? The investor-relations profession shares common ground with them.  Great effort and time go into telling the story so it resonates. Hedge funds come at a cost because they’re ostensibly better at sorting fact from fiction. Both disciplines are about standing out.

Apple stands out for instance, touching a 52-week high yesterday following resurgent growth. Yet as my friend Alan Weissberger at fiendbear.com notes, Apple earned $8 billion less in 2016 than the year before and spent $20 billion buying back stock.

People are buying its future, is the retort. If by that one means paying more for less since it’s likely AAPL will continue to consume itself at better than 5% per annum, then yes. But that’s inflation – more money chasing fewer goods.

I’m not knocking our epochal tech behemoth. It’s neither pulp fiction nor autobiography to the market. AAPL is its pillar. Models aren’t weighing mathematical facts such as its 5.5 billion shares of currency out, 15% less than three years back. But who’s counting? Not SPY, the most actively traded stock, an exchange-traded fund and AAPL its largest component.

If the models needing AAPL buy it, the whole market levitates in a weird, creaking, unsteady way.  This is what hedge funds have missed. Fundamentals are now back seat to weighting. If you pack weight, the cool kids of the stock market, you rise. When you’re out of the clique, you fall.  Your turn will continually come and go, like a chore schedule.

Hedge funds are also failing to realize that there is no “long only” money today.  Not because conventional longs are shorting but because the whole market is half short – 48% on Feb 6. One of our clients was short-attacked this week with short volume 23% below the market’s average. We doubt the shorts know it. 

Hedge funds are chasing the market because they don’t understand it anymore. No offense to the smartest folks in the room. They’re confusing busy with productive, spending immense sums examining business nuances when the market is a subway station of trains on schedules.

There are two lessons here for investor-relations folks and by extension executives of public companies and investors buying them.  IR people, learn by observation. Don’t be like hedge funds, failing to grasp market structure and getting run over by the Passive train.  Learn how the market works and make it your mission to weave it into what you tell management. Structure trumps story right now.

Second, hedge funds show us all that there’s a mismatch between the hard work of studying markets and how they’re behaving.  Either work, smarts and knowledge no longer pay, or there’s something wrong with the market.  Which is it? 

Stay tuned! We’ll have more to say next time.