Tagged: behaviors

What’s Changed

We’ve been pandemicking across the fruited plain and through the stock market for better than two months. Now what?

I still rue my decision Friday Mar 13 to delay skiing in Steamboat till the next day (it was Fri the 13th after all). The next day the slopes closed for the season.

It’s a reminder not to put off till tomorrow what you can do today. And it raises this question:  What’s changed in the stock market since fear drove us to ground?

Let me wrest your eyes from the headlines over to what the money is doing, demographically. Under Regulation National Market System, exchanges can’t have a “no shirt, no shoes, no service” rule for who buys and sells stocks in the store. Reg NMS requires fair access for all.

We can debate whether giving the public a cheap, slow look at stock prices and volume – the consolidated tape – while selling the pros with fat wallets better, faster and deeper data is fair access. And exchanges handle only about 60% of volume.

But I digress.

On Jan 20, 2020, about 13% of trading volume came from Active Investment, your Benjamin Grahamers, your stock-pickers.

About 16% tied to managing risk and leveraging returns. This is who’s on the other side when there is buying or selling of puts and calls. Or, say, a bank selling a swap for the returns in Financials, then offsetting the risk by shorting Consumer Staples.

Around 24% was Passive investment like quants and index funds.

Nearly 47% was Fast Trading, machines with a horizon of a day or less modeling the math of changing prices.

By Mar 30, coming off the current market bottom, boy had behaviors changed.  Active Investment was up 8% even as volume had exploded to record levels.  That means Active money was buying the bottom, value-style.

Passive Investment tracking the mean, or following global macro factors, or parrying volatility risk was rocked off the balance beam. It plunged 29% as a share of volume.

Moving in opposite fashion, Fast Trading exploded to 57% of trading volume, up 21%. This is what was driving record trading.  WMT, Sam Walton’s globe-crushing consumer staples empire, was averaging 45,000 trades daily Jan 20.  On Mar 30 as stocks were boomeranging out of pandemic hell, it was averaging 146,000 trades daily – an astonishing 224% increase.  Blame Fast Traders.

And finally, Risk Mgmt, the counterparties to derivatives and borrowing for leverage that depend on future prices, dropped 25%.

These behavioral changes describe what happened better than all the headlines, all the Daily Pandemic Updates with Dr. Fauci and team, the Death Clock ticking on the right side of the TV screen, all the Federal Reserve actions, the 40 million people out of work, the 50 million getting paid by loans from the Fed instead of revenue from the job.

Really, 50% of the market’s value vanished as the engine of today’s equities, Passive Investment and the implied leverage in Risk Mgmt, imploded like an unused football stadium where demolition charges change it in seconds from the Roman Coliseum to a pile of steaming dust.

But the market didn’t lose 50% of its value.

Exactly.  You’re catching on.

About 21% of the market’s rebound is speculation on the tick data.  Another 8% is Active investment, stock-pickers putting in a bottom on Fed action, American resilience.

Maybe only 8% of the bounce is real.  Regardless, the combination gives us a 30% (close to it) recovery for the S&P 500.

What about now? At May 20?

Active Investment remains the same. Zero percent change. Risk Mgmt is unchanged too, 0% difference from Mar 30 to May 20. Passive is up 12%, Fast Trading down 4%.

Apply these data to what’s ahead.  Active money is content, committed to a “bottom is in” posture. Risk Mgmt is expensive and uncertain.  Passive money is trying to get its mojo back but it’s half what it was.  And Fast Traders gaming those moving parts, the prices of stocks, are retreating, uncertain.

You’d be hard-pressed to see how these data take us to new highs. You’d also say they don’t smack of another smackdown.

But the pandemic data are still here. They’ve not changed much the past six weeks. Market structure is like water. Disturbances roil it.  When those events pass, it reverts to stillness.

The data are still sloshing.

If the waters are troubled, then even as commuter traffic picks up, gas prices tick up, the city stirs again, keep one eye on the deep. What’s changed at this point is bigger than what’s returned to normal.  Keep your hands inside the gunwales.

Time and Sentiment

Time matters.

We’ve gone 42 trading days with the ten-point Market Structure Sentiment index, our proprietary measure of the propensity of algorithms to lift or lower prices, over 5.0. That’s a growth-at-a-reasonable-price (GARP) market since Oct 17.

It’s by no means the longest. More on that in a moment.

The market seems impervious to fault lines as we move into year-ending options-expirations tomorrow through Friday, and index rebalances, and portfolio window-dressing.

It’s nothing like either 2010, the Year of the Flash Crash, or 2012, the Year of the Glitch. I wrote an editorial for IR Magazine on those, a retrospective ahead of 2020 on the last decade of market structure.

The market’s capacity to relentlessly rise through a corporate earnings recession (we’ve had three quarters of falling comparative profits), trade disputes, Presidential impeachment, on it goes, shows how both the IR profession and investors need different data in the arsenal to understand how stocks are valued.

Two other terrific IR Magazine pieces highlight the value of data to IR. We’re not alone! Reporter Tim Human describes how AI Alpha Labs uses deep-learning to help investors understand how to achieve better returns – something IR must know.

Oliver Schutzmann of Iridium Advisors says future IR will be data science – because that’s how the market works.

Speaking of data, ours for the S&P 500 show Active money the past year was the lead buying behavior 7% of the time. The worst day was Dec 19, 2018, with just one company earning what we call a new “Rational Price” from Active Investment. The best day came a month later on Jan 18, 2019, when 26% of the index had new Rational Prices.

Add selling, and Active money leads the S&P 500 behaviorally about 14% of the time.

Back to Sentiment, over the 42 days where the market has gone up, up, up on positive Sentiment, Active money led buying just 6% of the time. Exchange Traded Funds have led, our data indicate, 67% of the time, directly or indirectly.

Data points like these are requisites of the IR job the next decade. And measuring changing behavioral trends will be essential to understanding stock prices. Case in point, I saw a client’s data yesterday where Fast Traders, automated machines creating price-changes, were responsible for a 40% 2019 decline in equity value.

Machines don’t know what you do. But they can trigger negative and positive chains of events divergent from fundamentals.

In this case, trading machines blistered shares on consecutive earnings reports, which in turn pushed Passive money to leave because volatility created tracking errors, which caused market cap to fall out of the Russell 1000 – which is 95% of market value today.

Active money was incapable of overcoming the overwhelming force of Passive behavior.

Back to Sentiment and Time, before the market tipped over in the fourth quarter of 2018 Sentiment stayed around 5.0 or higher for 66 days. When it finally dipped below 4.0, a Sentiment bottom, the market was cast into tumult.

Part of the trouble was delayed portfolio rebalances. When markets go up, investors put off aligning positions to models. When the turn comes, there’s a scramble that compounds the consequence.

We’re hitting one of those crucial points this week, delayed rebalances colliding with options-expirations, index-rebalances and year-end.

We may see nothing. After all, it’s only been 42 days. Sentiment went 45 days at 5.0 or better this spring on the great January rally. There were 42 positive days from June 11 to Aug 8, too.

My final thought in the final fresh blog for 2019 (we’ll do retrospectives to finish out the year) is a monetary one. Karen reminds me that monetary policy clears a room like a fart – so you can’t talk about it often.

But it’s another data point driving market behavior. As the Federal Reserve has turned accommodative again – that is, it’s shifted from shrinking its balance sheet and raising rates to expanding assets and lowering rates – we’ve seen a corresponding fall in shorting and derivatives-leverage in stock-trading.

In fact, a steep drop for shorting coincided with a sudden spike in what’s called the Fed Funds overnight rate. Remember that? Happened in September. The rate the Fed had set near 1.5% exploded to 10% as the market ran out of cash.

Ever since it’s been troubled, the Fed Funds market. The Fed keeps injecting tens of billions of dollars into it. That market is meant to provide banks with temporary liquidity to process payrolls, taxes, credit-card payments, transaction-settlements and so on.

What if ETFs are using cash to collateralize transactions (rather than actual stocks) at the same time rising consumer debt is beginning to weigh on bank receipts and liquidity?

If that’s at all the case, time matters. We’re not worried about it – just watchful. But with so vast a part of market volume tracing to ETFs, and Sentiment getting long in the tooth, we’re cautiously wary as this fantastic trading year ends.

Day to Day

Here in CO we can count on sun much of the time but we still watch the weather forecast.

It would be a real pain to drag the skis out and drive up the mountain only to find the resorts bereft of snow.  For one, it’s an hour and a half on I-70 through the Eisenhower Tunnel to Summit County and the Arapahoe Basin, Keystone, Breckenridge and Copper Mountain ski resorts (and double that to our fave, Steamboat).

“You could use social media, Tim.  You can have the resorts text you about conditions.  You can go to onthesnow.com, opensnow.com, coloradoski.com—”

Right, I know that. I’m making a point about dealing with things as they come without thinking about the future. What’s called living day-to-day.  Some of us might want to do that. Get away from the schedule, the rat race. But it’s not a life strategy.

How come we do it with stocks?

Let me explain. Investor-relations folks, for the moment I’m talking to you.  (Investors, listen and see how it applies.) This is typically what you’ll get if you ask an exchange what’s happening with your stock:

The stock opened just above the blah blah blah level then broke out to the upside before basing around noon as profit-takers took over. The bulk of the volume occurred in the morning hours. There was one block, the opening trade, and BAML led most actives (880k), along with Interactive Brokers (615k), GSCO (325k) and JPM (70k).  IBKR often handles retail while the rest generally trade for institutions.

I’m not picking on exchanges. I’m asking what this tells you? It’s the same information I was getting fifteen years ago. No comparative forecast, no indication of what behavior set price, no trends, patterns. It’s a narrative suggesting the day is an end unto itself.

This is lugging skis to Breck on a shorts and flip-flops day.

Compare to the oft-maligned weatherperson.  They’re not always right but they give reliable forecasts. It’s math.  The weather keeps changing but we don’t stop reading forecasts. Right?

Like the weather, the stock market is continually changing. And like weather it’s got measurable patterns because it too is governed by mathematical principles.

Patterns abound. We give Wall Street general expectations of financial trends and patterns through guidance. The Peloton stationary web-connected exercise bike we love gives us troves of trend and pattern data on our performances (sometimes to our chagrin).

I know executives love trends and patterns because they tell me. They like to know what’s coming because they’re people responsible for outcomes and it’s how they think. They appreciate seeing patterns behind price-moves.

We have your trends, patterns and forecasts.  If you’d like to see them, let me know.

The stock market isn’t a set of disconnected events one upon the next called trading days that begin at zero, crescendo, and conclude at a finish line. It’s impossible for everything material to investment behavior to wrap by 4:00 p.m. Eastern Time each day. There’s a pattern at work you can be sure. The average stock trades 13,000 times per day in 200-share increments (and the last price of the day is the 13,000th then).

I’ll share some patterns and trends to finish. Broadly, the key behavior the past week driving big gains and yesterday’s intraday volatility is Risk Mgmt – the use of derivatives to protect and leverage portfolios. Second is Passive Investment. That combination means ETFs are responsible (passive money, plus a risk-transfer effort by market-makers).

Options expire tomorrow through Friday. The Sentiment trend in the market is white-hot growth behavior slamming into a ceiling, based on past trends and patterns. Shorting is rising, intraday volatility is rising.

While the market has persistent upside fervor, near-term volatility is baked in via behavior and options-expirations regardless of a government shutdown. Trends and patterns show it. It may change again next week. That’s how the market works.

If you’re an observer it’s nice to know what’s coming. If you’re an investor, it’s very material to know patterns and trends because your money is on the line. And if you’re in investor-relations, it’s your job.  You don’t want to live it day-to-day. That’s not a strategy.