Tagged: Market Structure

Dragon Market

As the market fell yesterday like a dragon from the sky (Game of Throners, the data are not good on dragon longevity now), 343 companies reported results, 10% of all firms.

Market fireworks were blamed yet again on tariff fears. Every tantrum is the Fed or tariffs it seems, even with hundreds publishing earnings. What happened to the idea that results drive markets?

Speaking of data, on May 6, the market first plunged like a bungee jumper off a bridge – and then caromed back up to a nonevent.

Behind the move, 21% of companies had new Rational Prices – Active money leading other behaviors and buying. That’s more than twice the year-long average of about 9% and the third-highest mark over the entire past year.

Talk about buying the dip. Smart money doesn’t see tariffs as threats to US interests (and likes the economic outlook, and likes corporate financial results). We’ve been using them to fund government since the Hamilton Tariffs of 1789.

So if not tariffs, why did stocks fall?

Before I tell you what the data show: Come to the NIRI Annual Conference, friends and colleagues. I’m moderating a panel the first day featuring hedge-fund legend Lee Cooperman, market-structure expert and commentator Joe Saluzzi, and SEC head of Trading and Markets Brett Redfearn.

We’ll talk about the good and bad in market-evolution the past 50 years and what’s vital to know now.  Sign up here.

IR folks, you’re the chief intelligence officer for capital markets. Your job is more than telling the story. It’s time to lead your executive team and board to better understand the realities driving your equity value, from Exchange Traded Funds to shorting and event-driven trends. It’s how we remain relevant.

Before you report results, you should know what the money that’s about you, your story, your results, your strategy, is doing – and what the rest of it is doing too. 

Take LYFT, which reported yesterday for the first time. Just 8% of LYFT volume is from Active Investment. By contrast about 22% is quantitative event-driven money, and over 58% is fast machines trading the tick. The balance ties to derivatives.

From that data, one can accurately extrapolate probable outcomes (ask us for your Market Expectation, or LYFT’s, and we’ll show you).

Every IR team should be arming its board and executives with a view of all the money, not just musing on how core holders may react – which is generally not at all.

And investors, if you’re focused only on fundamentals without respect to market structure, you’ll get burned.  I can rattle off a long list of companies beating and raising whose shares fell. The reasons aren’t rational but arbitrage-driven.

Having kept you in the dark like a Game of Thrones episode, let’s throw light on the data behind the late equity swoon: Always follow the money (most in financial media are not).

ETFs are 50% of market volume.  There have been $1.4 trillion (estimating for Apr and May) of ETF shares created and redeemed in 2019 already.

ETF shares are collateralized with stocks, but ETFs do not pool investor assets to buy stocks. In exchange for tax-free collateral, they trade to brokers the right to create ETF shares to sell to investors. The collateral is baskets of stocks – that they own outright.

The motivation, the profit opportunity, for that collateral has got nothing to do with tariffs or earnings or the economy. It’s more like flipping houses.

An Invesco PowerShares rep quipped to one of our team, “You see that coffee cup? I’d take that as collateral if I could flip it for a penny.”

ETF sponsors and brokers in very short cycles flip ETF shares and collateral. As with real estate where it works

Tech Sector Composite Stocks — Behavioral Data

great until houses start to fall in value, the market craters when all the parties chasing collateral try to get out at once (and it happens suddenly).

ETF patterns for the top year-to-date sector, Tech, are elongated way beyond normal parameters (same for two of three other best YTD sectors). It suggests ETFs shares have been increasing without corresponding rises in collateral.

With the market faltering, there’s a dash to the door to profit on collateral before the value vanishes. One thing can trigger it. A tweet? Only if a move down in stocks threatens to incinerate – like a dragon – the value of collateral.

How important is that for IR teams, boards, executives and investors to understand?

Driverless Market

Suppose you were human resources director for a fleet of driverless taxis.

As Elon Musk proposes streets full of autonomous autos, the market has become that fleet for investors and investor-relations professionals.  The market drives itself. What we measure as IR professionals and investors should reflect a self-driving market.

There’s nothing amiss with the economy or earnings. About 78% of companies reporting results so far this quarter, FactSet says, are beating expectations, a tad ahead of the long-term average of 72%.

But a closer look shows earnings unchanged from a year ago. In February last year with the market anticipating earnings goosed by the corporate tax cut of 2017, stocks plunged, and then lurched in Q3 to heights we’re now touching anew, and then nosedived in the fourth quarter.

An honest assessment of the market’s behavior warrants questioning whether the autonomous vehicle of the market has properly functioning sensors. If a Tesla sped down the road and blew a stop sign and exploded, it would lead all newscasts.

No matter the cacophony of protestations I might hear in response to this assertion, there is no reasonable, rational explanation for the fourth-quarter stock-implosion and its immediate, V-shaped hyperbolic restoration. Sure, stocks rise and fall (and will do both ahead). But these inexplicable bursts and whooshes should draw scrutiny.

Investor-relations professionals, you are the HR director for the driverless fleet. You’re the chief intelligence officer of the capital markets, whose job encompasses a regular assessment of market sensors.

One of the sensors is your story.  But you should consistently know what percentage of the driving instructions directing the vehicle are derived from it.  It’s about 12% marketwide, which means 88% of the market’s navigational data is something else.

Investors, the same applies. The market is as ever driven by its primary purpose, which is determined not by guesses, theory or tradition, but by what dominates price-setting.  In April, the dominating behavior is Exchange-Traded Funds.  Active investment was third of four big behaviors, ahead only of Fast Trading (curious, as Fast Traders avoid risk).

ETF shares are priced by spreads versus underlying stocks. Sure, investors buy them thinking they are consuming pooled investments (they’re not). But the motivation driving ETFs is whether they increase or decrease in price marginally versus stocks.

ETF market-makers supply stocks to a sponsor like Blackrock, which grants them authority to create an equal value of ETF shares to sell into the market. They aim to sell ETFs for a few basis points more than the value of exchanged shares.

The trade works in reverse when the market-maker borrows ETF shares to return to Blackrock in exchange for a group of stocks that are worth now, say, 50 basis points more than the stocks the market-maker originally offered.

If a market-maker can turn 30-50 basis points of profit per week this way, it’s a wildly winning, no-risk strategy. And it can and does carry the market on its updraft. We see it in patterns.

If it’s happening to your stock, IR professionals, it’s your job to know. Investors, you must know too, or you’ll draw false conclusions about the durability of cycles.

Big Market Lesson #1 in 2019: Learn how to measure behaviors. They’re sensors. Watch what’s driving your stock and the market higher (or lower – and yes, we have a model).

Speaking of learning, IR people, attend the 50th Anniversary NIRI Annual Conference. We have awesome content planned for you, including several not-to-be-missed market-structure sessions on hedge funds, the overall market, and ETFs.  Listen for a preview here and see the conference agenda here.  Sign up before May 15 for the best rate.

Big Market Lesson #2: Understand what stops a driverless market.

ETF-led rallies stall when the spread disappears. We have a sensor for that at ModernIR, called Market Structure Sentiment™ that meters when machines stop lifting or lowering prices.

It’s a 10-point scale that must remain over 5.0 for shares to rise. It’s averaged 6.2 since Jan 8 and has not been negative since. When it stalls, so will stocks, without respect to earnings or any other fundamental sensor.

I look forward to driverless cars. But we’ll want perfected technology before trusting them. The same should apply to a driverless stock market.

 

Surly Furious

Surly Furious would be a great name for a rock band. And maybe it describes stocks.  It’s for certain the name of a great Minnesota beer.

We are in Minneapolis, one of our favorite cities, where Midwest client services Director Perry Grueber lives, and where nature sprays and freezes into the artful marvel of Minnehaha Falls, and where over pints of Furious IPA from Surly Brewing we deconstructed investor-relations into late evening.

It got us thinking. ModernIR launched Sector Insights this week to measure how money behaves by sector. The data we track show all sectors topping save Consumer Staples.

“Wait, topped? The market has been declining.”

We’re not surprised that closing prices are reverting to the mean, the average, after big swings. You need to understand, public companies and investors, that the market isn’t motivated by your interests.

It’s driven by profit opportunity in the difference in prices between this group of securities or that, over this period or that.

How do we know?  Because it’s what market rules and investment objectives promote. Prices in stocks are set by the best bid to buy or offer to sell – which can never be the same – and motivated most times not by effort to buy or sell stocks but instead by how the price will change.

Who cares?  You should, investors and public companies.

Suppose I told you that in this hotel where you’re staying the elevator only goes to the 5th floor.  You decide it’s immaterial and you set out to reach the 6th floor. You lead your board of directors and executives to believe it should be their expectation that they can reach the 5th floor. Yet as you arrive at the elevator you learn it goes only to the 4th floor.

Whose fault is that?

The beer that put Minneapolis on the map is from Surly Brewing, an India Pale Ale called Furious. What’s better in a name than Surly Furious?  It’s worth drinking.

When the market is surly and furious, you should know it. We can see it first in Market Structure Reports (we can run them for any company), and then in Sector Insights (just out Dec 10) and in the broad market.

Number one question: How does it change what I do?  Investors, it’s easy. Don’t buy Overbought sectors or markets. Don’t sell Oversold sector or markets, no matter how surly and furious they may seem.

Public companies, we expend immense effort and dollars informing investors. Data suggest disclosure costs exceed $5 billion annually for US public companies.

If we discovered the wind blows only from the west, why would we try to sail west? If we discover passive investors are attracting 100% of net new investor inflows, and investors don’t buy or sell your stock, should you not ask what the purpose is of all the money you’re spending to inform investors who never materialize?

We can fear the question and call it surly, or furious. Or we can take the data – which we offer via Market Structure Reports and Sector Insights – and face it and use it to change investor expectations.

Which would you prefer? We’ve now released Sector Reports. If you’d like to know what Sentiment indicates for your stock, your sector — or the broad market — ask us.

Sector Insights

We take a moment to honor the passing of George Herbert Walker Bush, 41st President of the United States, who earned respect across aisles and left a legacy of dignity, achievement and service.

Markets are closed today in Presidential honor, perhaps fortuitously, though it won’t surprise us if stocks surge back, confounding pundits. A CNBC headline at 4:24pm ET yesterday said, “Dow plunges nearly 800 points on fears of cooling economy.”

The article said the slide steepened when Jeffrey Gundlach of Doubleline Capital told Reuters the yield-curve inversion (three-year Treasury notes now pay more than five-year notes) signals that the economy is “poised to weaken.” A drubbing in Financials (weren’t we told higher rates help banks?) and strength for Utilities were said to support that fear.

Yet Sector Insights (I’ll explain in a moment!) for Financials show the rally last week came on Active Investment – rational people buying Financials.  In a spate of schizophrenia, did Active money seize a truncheon and bludgeon away its gains in a day?  Possible, maybe. But improbable.

Utilities have been strong all year (see Figure 1). Market Structure Sentiment™ for Utilities from Jan 3-Dec 3, 2018 is 5.4/10.0 – solidly GARP (sectors trade between 4 and 7 generally). Utilities haven’t dipped below 4.0 since late June.

If strength in Utilities signals economic fear, did it commence in January (or March, when they soared after the market corrected)?

What if it’s market structure?  Did anyone ask?  Add up the week-over-week change in the two behaviors driving Utilities highe

Figure 1 – Market Structure Sentiment(TM) – Utilities Sector – 2018. Proprietary ModernIR data.

r the past week and what we call internally “behavioral volatility” was massive – 22%.  Daily behavioral change is routinely 2% total!

We’ve long said that behavioral volatility precedes price-volatility.  Last Friday, daily behavioral volatility in the entire market was a breathtaking 19.6% (5.4% jump in Active Investment, sizzling 14.2% skyhook from Fast Traders) at month-end window-dressing.  On Thu, Nov 29, it was 20%, driven by Passive Investment and Risk Mgmt, a behavioral combination signaling ETF creations and redemptions.

On Monday Dec 3, ETF basket-moves drove another 15% surge. Think about it: 20%, 20%, 15%. Picture a boat rocking as people rush from one side to the other, and the momentum builds until the boat tips over.

Economic fear exists. And the yield curve has predicted – what’s the economics joke? – five of the last three recessions.

But the curve could as well trace to selling by the Fed of $350 billion of Treasurys and mortgage securities while the Treasury gorges on short-term paper to fund deficits.

Most see the market as a ticking chronometer of rational thought.  It’s not, any more than your share-price is a daily reflection of investors’ views of your management’s credibility. It is sometimes. Data say about 12% of the time.

If pundits think it’s economics when it’s a structural flaw in the market, the advice and actions are wrong.  And we could be caught unprepared.

Don’t people move money into and out of index funds or ETFs too in reaction to economics?  Sure. But not daily.  We just had this discussion with our financial advisors and we like most allocating assets plan in long swaths on risk and exposure.

And I’ll say it till everyone gets it: ETFs do not form capital or buy or sell stocks. They are continually created and redeemed by parties swapping collateral (stocks and cash) back and forth to profit on spreads between that underlying collateral and the frenzy of arbitrage in ETF shares traded in the stock market.

It’s those people and machines in the market who rush back and forth and rock the boat, arbitragers trying to profit on different prices for the same thing.

Especially if they’ve borrowed collateral or leveraged into expected short-term moves. They’ve tipped the market over three times now just since early October.

You can see it in patterns. Speaking of which, wouldn’t it be nice to know what’s driving your sector the next time the CEO says, “Why is our stock down while our peers are up?”

To that end, we’re delighted to announce our latest innovation at ModernIR:  Sector Insights.  Now you can compare the trading and investment behaviors behind your stock and your sector.

We classify every company by GICS industry and sector.  Algorithms can then cluster a variety of data points from investment and trading behaviors, to shorting, and intraday volatility and Market Structure Sentiment™, providing unprecedented clarity into sector trends and drivers.

If you’re interested in seeing your Sector Insights alongside your Market Structure Report, send a note to Mike Machado here. (Clients, you can see a three-minute overview of how to use Sector Insights in concert with your Market Structure Reports here.)

Meanwhile, buckle up.  December could further provide a wild ride to investors – and you’ll see it in Sector Insights if it’s coming.  We’ll be here to help you help your executives and board directors understand what’s driving equity values.

Age of Discovery

Bom Dia!

We returned Monday from Portugal after two fantastic weeks roaming and pedaling this land famed for its explorers. We stood at Cape St. Vincent, once the end of the known world where Vasco da Gama, Ferdinand Magellan and Christopher Columbus sailed off to what many thought was a ride over the edge.

In a sense, the investor-relations and stock-picking professions are at Cape St. Vincent. The market we’ve known, the one driven by business fundamentals, is a spit of rock projecting into a vast sea of unknown currents.  We are explorers on a forbidding shore.

Henry the Navigator, father of the Age of Discovery, challenged fear, superstition and entrenched beliefs to create the Harvard of sailing schools on the barren shoals of Sagres, a stone’s throw south of Cape St. Vincent. From it went intrepid adventurers who by sailing what proved to be a globe laid the cornerstones of today’s flattened earth that’s interconnected economically and culturally.

Speaking of conquering the unknown, I’m paneling for the NIRI Virtual chapter at noon ET today on the impact of Exchange Traded Funds, then tomorrow addressing the Capital Area NIRI group on how ETFs drive the market.

It’s what the money is doing. If as IR professionals we’re to fulfill our responsibilities to inform our boards about important facets of equity valuation, we have to know these things as explorers knew the sextant.

By the same token, investors, if you know only how stocks should be valued bottom-up but not how the market transforms stocks into products and data priced by arbitrage, then you’ll fail to beat the benchmark.  Market Structure is as essential to navigation as was knowing currents and stars and weather patterns for yesteryear’s seafarers.

How do we at ModernIR know we’ve got the right navigational tools for today’s market?  Vasco da Gama combined knowledge and forecasts learned at the School of Navigation to find a passage by sea to India.

We combine knowledge of market rules and the behavior of money with software and mathematical models that project outcomes – passages.  If our knowledge is correct, our sextant will mark a course.

Our models are roughly 93% accurate in forecasting short-term prices across the entire market – a startling achievement. For comparative purposes, moving averages have no measurable statistical capacity to forecast prices, and variances between them and actual prices are factors larger than that in our models. Why use tools that don’t tell you where you’re going?

Ownership-change is a tiny fraction of trading volume. What does it tell you about how your price is set?  Nothing. By contrast, patterns of behavioral change are as stark as waves in Cascais – or the world’s biggest surfers’ waves off Nazare.  We see waves of sector rotation, short-term turns in the market – just like weather patterns.

We’re in an age of discovery. Some will cling to a barren spit of land, doing what they’ve always done. The rest will set a new course to a future of clarity about how stocks are priced and valued and how money behaves.  Which group will you be in?

Hope to see you at a NIRI chapter meeting soon!  And ask us how we can help you navigate the coming earnings season with better tools.

Lab Knowledge

We are finally watching Breaking Bad five years after the most successful basic cable series in television history ended.

It’s symbolic of the era that we’re viewing it via Netflix. And NFLX Market Structure Sentiment is bottomed, and shorts have covered. We’ll come to market structure in a moment because it intersects with Breaking Bad.

Launched in 2008, Breaking Bad is about high school chemistry teacher Walter White, who turns to cooking methamphetamine to cover medical bills. He becomes Heisenberg, king of blue meth.

I won’t give the story away but what sets Walter White apart from the rest of the meth manufacturers is his knowledge of molecular structure. Let’s call it Lab Knowledge.  With lab knowledge, Walter White concocts a narcotic compound that stuns competitors and the Drug Enforcement Agency alike. He produces it in a vastly superior lab.

In the stock market there’s widespread belief that the recipe for a superior investment compound is the right set of ingredients comprised of financial and operating metrics of businesses.

Same goes for the investor-relations profession, liaison to Wall Street. We’re taught that the key to success is building buyside and sellside relationships around those very same financial and operating metrics.

There’s a recipe. You follow it, and you succeed.

Is anyone paying attention to the laboratory?

The stock market is the lab. Thanks to a total rewriting of the rules of its chemistry, the laboratory has utterly transformed, and the ingredients that underpin the product it churns out now are not the same ones from before.

I don’t mean to toot the ModernIR horn, but we did the one thing nobody else bothered to do.  We inspected the lab.  We studied the compounds it was using to manufacture the products circulating in the market (ETFs, high-speed trading, etc.).

And we saw that stock pickers were failing because they didn’t understand what the lab was producing. It was not that they’d stopped finding the historically correct chemical elements –financial and operating metrics defining great companies of the past.

It’s that these ingredients by themselves can no longer be counted on to create the expected chemical reaction because the laboratory is compounding differently.

And the difference is massive. The lab determines the outcomes. Write that down somewhere. The lab determines the outcomes. Not the ingredients that exist outside it.

So investors and public companies have two choices.  Start a lab that works in the old way.  Or learn how the current lab works. The latter is far easier – especially since ModernIR has done the work. We can spit out every manner of scientific report on the ingredients.

Back to market structure, before NFLX reported results it was 10/10 Overbought, over 60% short and Passive money – the primary chemical compound for investments now – was selling.  The concoction was destined to blow up.

Everyone blamed ingredients like weaker growth and selling by stock pickers, when those components were not part of the recipe creating the explosion in NFLX. Now, NFLX will be a core ETF manufacturing ingredient, and it will rise.

Investors, what’s in your portfolio?  Have you considered the simmering presence of the laboratory in how your holdings are priced?  And public companies, do you have any idea what the recipe is behind your price and volume?

If you want to be in the capital markets, you need lab knowledge. Every day, remind yourself that the ingredients you’re focused on may not be the ones the lab is using – and the lab determines the outcome. The lab manufactures what the market consumes.

One of the things we’ll be talking about at the NIRI Southwest Regional Conference is the laboratory, so sign up and join us Aug 22-24 in Austin.  Hope to see you there!

 

 

The Matrix

FactSet says quarterly earnings are up 23% from a year ago. Why have stocks declined?

There’s an inclination to grasp at fundamental explanations. Yet stock pickers generally don’t reactively sell because most times they must be fully invested (meaning to sell, they must buy).

Blackrock, Vanguard and State Street claim for Exchange-Traded Funds tracking the S&P 500 or Russell 1000 that turnover is 3-5%. (Editorial note: Those figures exclude creations and redemptions of ETF shares totaling trillions annually – a story we’ve told exclusively in the Market Structure Map.)

If investors are not responsible, who or what is?  Machines. By market rule all trades wanting to set the best bid to buy or offer to sell are automated – running on an algorithm. Why? Because the best price can be anyplace at anytime in the market system, and trades must move fluidly to it.

Thus, machines have become hugely influential in determining how prices are calculated. An amalgam of broker algorithms, smart routers and exchange order types are continually calculating the probability of higher or lower prices and completing a trade.

By our measures, back on Apr 19 the probability of calculating higher prices dropped. Why? Perhaps risk calculations for asset managers ordered rotation from overweighted equities or a need to slough off capital gains from ETFs (stuff mathematical models routinely do).

We have a mathematical representation for it: The market was Overbought. It doesn’t mean people are overpaying for fundamentals. It says machines will lack data to arrive at higher prices.  What follows this condition is nearly always a flat or lower market.

We know then that math arising from market rules is more powerful than a 23% increase in earnings. That should disturb stock pickers and public companies. If the market is The Matrix (if you’re younger than the movie, watch it to understand the reference), what are we all doing straining so hard to be outliers?

And why do machines possess the capacity to trump value-creation?

Good question.

By the way, the math is now changing. It’s resolving toward a mean.  We measure these price-setting propensities with a 10-point scale, the ModernIR Behavioral Index. Most of the time the stock market trades between 4.0 and 6.0, mean-reverting to 5.0 or thereabouts.

It returns to the middle because rules propel it there. Stocks must trade between the best bid or offer. What lies there? The average price. What do indexes and ETFs hew to? Averages.  We’ve explained this before.

When the market slops beyond 6.0, a mean-reversion is coming.  When it drops below 4.0, it signals upward mean-reversion. The market has descended from about 6.5 a week ago to 5.2 yesterday. The market will soon level off or rise as it did microcosmically yesterday, a day of extremes that ended back near midway (but it’s not down to 4.0, notice).

If math is a more reliable indicator of the future than earnings, why is everybody fixated on earnings versus expectations? What if that model is obsolete? And is that a bad thing?

I don’t think so. The earnings-versus-expectations convention promotes arbitrage. Shouldn’t capital-formation power the market?

Currency Volatility

 We interrupt the white-hot arc of the stock market for this public-service announcement: Watch the dollar.

While any number of factors might be selected as reason for the DJIA’s 360-point drop yesterday, one macro factor correlates well: The relative buying power of the US dollar, the world’s reserve currency.

Give me two minutes, and I’ll show you.

Sure, one can say the market is due for a pullback. But randomly? Donald Trump’s first inaugural address is an easy target. Do we call investors schizophrenic if the market regains yesterday’s losses today or tomorrow?

How the US dollar fares versus other global currencies remains a barometer for US stocks. It’s been especially true since 2008 because the Financial Crisis marked a stark turn for central banks toward coordinated global policy.

But all the way back to 1971 when the United States left the gold standard for the 20th century’s version of a cryptocurrency experiment, a floating-rate dollar, shocks to equities trace to gyrations in the currency (the economy’s risk assets like stocks and bonds have replaced gold as the backing commodity but that’s another story).

Black Monday, the October 19, 1987 global stock crash that hacked 508 points or 23% of blue-chip value off the Dow Jones Industrial Average (DJIA) followed a stretch of currency volatility (and interest-rate volatility as the two are intertwined).

For perspective, the DJIA lost a greater number of points just now, Jan 29-30 (533), than it did Oct 19, 1987 (508). Heights today are so lofty that past ravines are wrinkles.

The collapse of the Internet Bubble in 2000 came after a sharp acceleration for the dollar on rate hikes by Fed chair Alan Greenspan to slow what he famously called “irrational exuberance.” He recognized the stock market reflected inflation, which as Milton Friedman said, is always and everywhere a monetary phenomenon.

Inflation is more money than an economy can readily deploy, not rising prices, which is a consequence. Stuffing money into economies is like squeezing a balloon. You don’t know where the air pockets will form.  Prices rise, but not always how or where central bankers suppose.

On May 6, 2010, market seams split fleetingly in the Flash Crash, the DJIA first plunging down and then bucking back up about a thousand points.  Before it, volatility was rattling the euro/dollar trade, a product of 2009’s massive “quantitative easing” by the Federal Reserve as the US central bank gave the global money balloon a giant squeeze and the dollar went into a steep dive.

In latter August 2015 the DJIA lost more than 6% over a series of days following a sudden currency-devaluation in China that tripped the delicate global balance.  And remember the Fed’s first post-crisis rate hike – a buck-booster – in Dec 2015? Near catastrophe for stocks (most for energies as oil plunged when the dollar rose) in January 2016.

We come to yesterday. What came before it? Last week the dollar plummeted about 3% as traders interpreted comments by US Treasury Secretary Steven Mnuchin to mean he wanted a weaker dollar.

Sure, there’s a sort of Clockmaker God quality to the idea that if we can pan back in the mind’s eye, the financial markets are all perched atop a giant dollar bill that occasionally flutters and spills something into the abyss.

On the other hand, it could be fixed. The dollar, that is. If the dollar wasn’t always fluctuating, we could better concentrate on, say, saving more, or investing capital without worrying about the corrosive effects on returns of a depreciating currency.

So, Jay Powell.  You’ll be steering the Fed after Janet Yellen bids us adieu this week. Imagine how much easier everything would be if the dollar wasn’t one of the things gyrating like stock-prices.

Times and Seasons

You need examples.

I was wishing a longtime friend who turns 50 Sep 20 a happy what they call on Game of Thrones “Name Day,” and it called to mind those words. We were college freshmen 31 years ago – how time flies – and I thought back to my Logic and Philosophy professor.

He’d say in his thick Greek accent, “You need examples.  You cannot illustrate anything well with merely theory, nor can you prove something without support.”

In the stock market, examples are vital for separating theory from fact. And for helping investor-relations professionals and investors alike move past thinking “the market is complicated so my eyes glaze over” to realizing it’s just a grocery store for stocks.

With a rigid set of prescribed rules for consumers.  You can watch consumers comply. Some race around the store grabbing this or that. Others mosey the aisles loading the cart.

Timing plays a huge role. It’s not random.

I’ll give you an example.  Monday I was trading notes with a client whose shares are Overbought, pegging ten on our 10-point Sentiment scale, and 65% short.

Okay, here we go. What does “Overbought” mean? Let’s use an analogy. You know I love using spinach, right.  Overbought means all the spinach on the grocery store shelf is gone.  If the store is out of spinach, people stop consuming spinach.

What alone can override an overbought spinach market is willingness to pay UP for more spinach by driving to another store. Most consumers won’t. They’ll buy something else.

All analogies break down but you see the point?  We can measure the interplay of price and behaviors in shares so we know when they’re Overbought, Oversold, or about right — Neutral.

Now let’s introduce timing into the equation.  Monday was the one day all month with new options on stocks and other securities officially trading.  Our example stock was up 4%.  Yet it’s Overbought and 65% short.

What’s “65% short?”  That means 65% of trading volume is coming from borrowed shares. Traders are borrowing and selling shares every day to profit on short-term price-changes. It’s more than half the trading volume.

A quick and timely aside here:  We were in Chicago Friday for the NIRI chapter’s annual IR Workshop and the last panel – an awesome one spearheaded by Snap-On’s Leslie Kratcoski, an IR superstar – included the head of prime brokerage for BNP Paribas.  Among many other things, prime brokers lend securities. BNP is also a big derivatives counterparty.

Those elements dovetail in our example. The stock was Overbought and 65% short yet soared 4% yesterday. Short squeeze (forced buying), yes. But we now know WHY.

News didn’t drive price up 4%.  It was a classic case of big moves, no news. One could cast about and come up with something indirect. But let’s understand how the grocery store for your shares continuously reveals purpose.

The CONDITIONS necessary for the stock to move up 4% existed BEFORE the move.  This is why it’s vital to measure consistently.  If you’re not measuring, you’re guessing.

Why would the stock soar with new options trading?  There is demand for derivatives tied to the company’s stock. Parties short had to buy in – cover positions.  Why? Because the counterparty needed shares to back new derivatives positions (naked puts or calls are much riskier).

The stock jumped 4% because that’s how much higher the price had to move to bring new spinach, so to speak, into the market, the grocery store. Nobody wanted to sell at current prices – the stock was Overbought. Up 4%, sellers were induced to offer shares.

On any other day of the month these events would not have coalesced. I suspect hedge funds behind the bets had no idea their cloak of secrecy would be yanked off.

Once you spend a little time measuring and understanding the market, you can know in a minute or two what’s setting price. And now we know to watch into October expirations because hedge funds have made a sizeable bet, likely up (if they’re wrong they’ll be sellers ahead of expirations – and we’ll watch short volume).

Speaking of timing, options expirations for September wraps officially today with VIX and other volatility trades lapsing. The market has been on a tear. Come Thu-Fri, we’ll get a first taste of autumn.  Next week brings window-dressing for the month and quarter.

Our Sentiment Index marked a double top through expirations. About 80% of the time, an up market into expirations is a down market after, and with surging Sentiment, down could be dramatic say five or so trading days from now.

You’ll have to tell me how it goes! Karen and I are off to mark time riding bikes from Munich to Salzburg through the Bavarian Alps, a way to measure my impending 50th birthday next month.  We call it The Four B’s:  Beer, bread, brats and bikes. We’ll report back the week of Oct 9.

A Big Deal

Tim, I’m listening,” said this conference attendee, “and I’m wondering if I made the wrong career choice.” He said, “Am I going to be a compliance officer?”

We were in Boston, Karen and I, marking our wedding anniversary where the romance began: at a NIRI conference, this one on investor-relations fundamentals for newbies. I was covering market structure – the behavior of money behind price and volume – and what’s necessary to know today in IR (it wouldn’t hurt investors to know too).

It prompts reflection. The National Investor Relations Institute’s program on the fundamentals of IR that Karen and I both attended over a decade ago differed tectonically. Then, most of the money in the market was fundamental.

Companies prided themselves on closing the books fast each quarter and reporting results when peers did – or quicker.  I remember Tim Koogle hosting thousands on the Yahoo! earnings call about a week after quarter-end, the company setting a torrid pace wrapping financial results and reporting them.

Most of the money was buying results, not gambling on expectations versus outcomes. There were no high-frequency traders, no dark pools, limited derivatives arbitrage, no hint yet that passive investment using a model to track averages instead of paying humans to find better companies would be a big deal.

I’ve over these many years moved from student to faculty. I had just described the stock market today for a professional crop preparing to take IR reins, no doubt among it those who years from now will be the teachers.

I explained that the stock market possesses curious and unique characteristics. When you go to the grocery store and buy, say, a bag of spinach, you suppose the price on it is the same you’ll pay at the cash register. Imagine instead at the checkout stand the price you thought you were paying was not the same you were getting charged.

Go another step further. You had to buy it by the leaf, and someone jumped ahead of you and handed you each leaf, charging a small fee for every one.

That’s the stock market now. There is always by law a spread between the bid to buy and offer to sell, and every interaction is intermediated so regulators have a transaction trail.

I explained to the startled attendees unaware that their shares were priced this way that in my town, Denver, real estate is hot. Prices keep rising. People list houses for sale – call it the best offer to sell – and someone will offer a higher price than asked.

In the stock market today, unlike when I began in the profession, it’s against the law for anyone to bid to buy your shares for a price greater than the best offer. That’s a crossed market. Nor can the prices be the same. That’s a locked market. Verboten.

So in this market, I said, trillion of dollars have shifted from trying to find the best products in the grocery store to tracking average prices for everything. This is what indexes and exchange-traded funds do – they track the averages.

By following averages and cutting out cost associated with researching which things in the grocery store are best, money trying to be average is outperforming investors trying to buy superior products. So it’s mushroomed.

And, I said, you can’t convince the mathematical models tracking the averages to include you.  You can only influence them with governance – how you comply with all the rules burdening public companies these days, even as money is ignoring fundamental performance and choose average prices.

That’s when the question came.  See the first paragraph.

I said, “I’m glad you asked.”  Karen says I need to talk less about the problems in our profession and more about the opportunities.  Here was a chance.

“It’s the greatest time in history to be in our profession,” I said.

Here’s why. Then, we championed story, a communications job. Today IR is a true management function because money buying story is only a small part of volume. IR demands data and analytics and proactive reporting to the management and Board of Directors so they recognize that the market is driven as much by setting prices as it is by financial results.

There are $11.5 trillion of assets at Blackrock, Vanguard and State Street alone ignoring earnings calls and – importantly – the sellside.  IR courts investors and the sellside.

It’s time to expand the role beyond the message. Periods of tectonic change offer sweeping professional opportunity. Investors should think the same way: How does the market work, who succeeds in it and why, and is that helpful to our interests?

IR gets to answer that question.  It’s a big deal.  Welcome to the new IR.