Tagged: Options Expirations

Stocks and the Fiscal Cliff

CNBC has a Fiscal Cliff countdown clock.

You can’t click a TV remote or a web page without somebody declaring that Congress’s inability to compromise on tax rates and spending cuts before December 31 will incinerate equities.

It’s predicated on sound logic. Higher taxes on investment behavior are likely to impact that behavior negatively. Motivation.

We here in Denver before we found the Holy Grail – Peyton Manning – hailed Tim Tebow, who famously sent a one-word tweet after Eli Manning’s Giants topped the Patriots in last year’s Super Bowl: Motivation.

If what one expects will happen isn’t aligned with motivation, then what one expects is unlikely to occur. That’s true in police work, business, life-goals – nearly everything. Including the stock market.

Suppose I expect that because you are a football fan you’re likely to be at Hanson’s Pub near 6:30 p.m. Mondays in Denver for the weekly NFL game. If “you” means my wife, who likes “Johnny Football” Manziel at her Alma Mater Texas A&M but doesn’t give a hoot about the NFL, my expectation won’t match reality. Monday Night Football does not motivate her.

What motivates the market? Many pundits (not all!) conclude that markets will behave badly unless a deal is in the works. That would be true if money in the markets were all rational. But statistically, Rational Investment – money following fundamentals – is only 15% of daily volume across the major US markets. Technically, we peg it at 14.2% the past 200 days, a bit more in the past five (exactly 15%). (more…)

Relativity and Dollars

How do you prove relativity?

When Einstein proffered the preposterous suggestion that all motion is relative including time, people clearly had not yet seen Usain Bolt. Or what happens to stocks after options-expirations when the spread between the dollar and equity indexes is at a relative post-crisis zenith.

Let me rephrase that.

As you know if you get analytics from us, we warned more than a week ago that a reset loomed in equities. Forget the pillars on which we lean – Behavior and Sentiment. Yes, Sentiment was vastly neutral. Behavior showed weak investment and declining speculation –signs of dying demand – all the way back in mid-August.

Let’s talk about the dollar – as I’m wont to do.

There is a prevailing sense in markets that stocks are down because earnings are bad. No doubt that contributes. But it’s like saying your car stopped moving because the engine died, when a glance earlier at the fuel gauge on empty would have offered a transcendent and predictive indicator.

Stocks are down because money long ago looked a data abounding around us. From Europe clinging together through printed Euros, to steadily falling GDP indicators in the US and China, to the workforce-participation line in US employment data nose-down like it is when economies are contracting not recovering, there were signs, much the way a piercing shriek follows when you accidentally press the panic button on your car’s key fob, that stuff didn’t look great.

We know institutional money didn’t wake up yesterday, rub its eyes, and go, “Shazzam! Earnings are going to be bad!” (more…)

Instant Replay

Let’s go to the tape.

That’s what we hear in sports now, especially football. Send it to the replay booth. Forget the referee’s call. We’ll check frame-by-frame and – yes, see, right there, his pinky finger holding the ball broke the goal line. TD!

I’m not suggesting instant replay is bad. We want accuracy. But revisiting calls changes the game. There’s a flow and rhythm disrupted by continual play-stoppages. There’s inherent sterility. We introduce a standard of perfection into an atmosphere dependent on imperfection. The game is played by imperfect humans and officiated by other imperfect ones.

With instant replay, the league is decreeing that officiating must be the one perfect element. To effect perfection, somebody loses. Players and the game are deprived of pace. We relieve participants of the opportunity packaged in every missed call to exercise character and behave gracefully. After all, life is neither perfect nor fair.

It’s a tradeoff.

We’ve got the same one in the markets. In fact, as I write, my email dinged with another trading halt, the second inside seven minutes (for NPSP and SCOG). No wait, we just had two more, for symbols SCLP and SGGG. These were all T2 or T12 halts at the Nasdaq, indicating market pauses to assess information, rather than single-stock circuit breakers as we saw multiple times the past five days under trading-halt codes T5-T7.

And yesterday as money gleefully cashed in derivatives ahead of options expirations today-Fri (rarely a good leading indicator for equities), stocks moved wildly all over the place – but just inside circuit breakers. (more…)

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. (more…)

Big Tick Talk

We all love soaring markets. When were you last dead sure what drove your stock up?

Today, a German court will decide if German taxpayers must back last week’s European Central Bank plan to buy Eurozone debt, which powered US equities to multi-year highs Sept 6. Stocks have moved higher since, with the dollar at May lows. What that court says may prompt stocks to swoop or swoon.

Thursday the 13th, Ben Bernanke speaks after the Federal Reserve’s monthly Open Market Committee meeting. That may boost stocks too, or disappoint them.

By the way, Friday I speak (having zero macro impact) to the IR council for MAPI, the manufacturer’s alliance, on “what lies beneath” market structure today. See you at the Intercontinental in Chicago.

Next week is huge. Options expire, quarterly rebalances to S&P indexes take place, and important European bond auctions go off – all between Sept 19-21. Correlation between the US dollar index and the S&P 500 is nearly symmetrical to late April’s when we warned clients of an imminent market retreat. Stocks then declined a thousand points over several weeks until the dollar in July began its longest slide since the Flash Crash. Beware risks.

In the data, evidence abounds. We’ve seen stocks curiously leap ex-dividend, whole peer groups shoot up 15%, and random shares move double digits up or down in two days without regard to the market or the peer group. Global statistical arbitrage – using math to calculate trading spreads globally – is rampant in behaviors, including the normally “rational” slice. As high as we’ve ever seen. (more…)

Window Dressing

Here’s a riddle:

Name a four-letter word that describes why currencies fluctuate and why money in equities modulates around options expirations and the ends of months and quarters.

While you’re thinking about it, I’ll tell you a story. I was in freshman college speech one morning many long years ago when a guy in class began his address by picking up a piece of chalk and announcing: “I am going to write on the board a four-letter word meaning intercourse.” We all cringed (it was a Christian college). He turned, scratched on the board, and then stepped out of the way.

He had written “talk.”

So the word we’re after is “risk.”

Occupants of the IR chair: We’re coming to the end of a quarter, and money is transferring risk now. It transferred risk with options expirations June 15 and June 20 and with Russell rebalances June 22. (more…)

The Epic Divide

Thrilling. Arduous. Rewarding. Draining. Spectacular.

No, not the Federal Reserve Open Market Committee meeting concluding today with a soliloquy before public microphones from the chairman.

We mean our grand cycling adventure riding the Rockies on the high backbone of the fruited plain last week. After 1,500 training miles we clocked several hundred more and about 25,000 vertical feet climbing a collection of the globe’s great mountain passes. The desire accomplished is sweet to the soul (one of my favorite sayings because it reflects the human spirit). Here are Independence Pass, the rim of the Black Canyon of the Gunnison, atop Ute Pass northwest of Silverthorne, and aspens outside Aspen.

Speaking of epic, NIRI this year again reminded me about the divide between how markets work now and – take no offense, it’s just a refrain from IR pros – what most of us know about them.

Here’s a current example. Why were prices and markets swinging wildly Tuesday, with disparity between major measures and extreme moves in stocks? Rational investment? Most of us intuitively know investors aren’t responsible.

What is? Fluctuating currencies, yes (hour-by-hour now). But did you know that VIX futures expire today? Last Thursday and Friday, other options and futures expired, and S&P indexes rebalanced.

Behaviorally, expirations are seismic (we study trading behaviors at a mathematical level) because trading is global, 24-hour, and multi-asset-class. When an instrument like a futures contract expires, there’s a ripple effect. (more…)

The 11.1% Occupying Earnings

The One Percent is a catchy phrase. But statistics highlight the 11.1%.

It’s earnings season. Fifty-seven percent of our clients have reported, our data show. In the past five days across the Nasdaq segment, rational investment activity – which means what you think it means – was 11.1% of volume.

Translating, just over one of ten trades in Nasdaq-listed companies (the NYSE was better but could flip-flop next week) resulted from active investment. Statistically, 88.9% of volume – not as cool as 99% but we report what the data show – was driven by something besides thoughtful investment.

Did your stock behave as you expected when you reported?

Our first client to report plunged through hedges and closed down 13%, and we hadn’t hit options expirations (Apr 18-20). A host of clients with calls before Apr 20 beat expectations and gave solid guidance. Half closed up; the other half, down.

Do the 11.1% matter? Unequivocally. So do the 88.9%. I’ll give you examples. A small-cap tech company last week closed down 6% on a miss and weak guidance, but data showed shares trading in what we call the “Midrange,” meaning money had mixed reactions. The stock’s up now.

Wait a minute, you say. How can money have mixed reactions to a miss? A lot of money doesn’t value shares on multiples alone. Any more than world markets peg the US dollar to its redemption value from the US Treasury (zero).

Shares have relative value, and speculative value. Relative value means “what’s this stock worth compared to alternatives in the group or market?” Speculative value means “will this stock help me net a profit in a portfolio of things that fluctuate?” Good answers to both questions can mean stocks rise on – or right after – misses. (more…)

Arbitragers Love Monetary Intervention

Say you were playing poker.

I don’t mean gambling, but real cards. You’re engaged with some seriousness. You’re watching how you bet and when, reading the players ahead and after you.

Then The House starts doling out stacks of chips. Would you play more or less cautiously if you had free chips?

Apply this thinking to equity markets, IR folks. In trading data, we saw European money sweeping into US equities Nov 28. Why did markets trembling Nov 25 decide by the following Monday to up the ante in risk-taking? Primary dealers implementing policy for global central banks also drive most program-trading strategies.

Thus, European money surmised that central banks would intervene, and their behavior reflected it. The rest caught on, and markets soared Nov 30 on free chips from central banks. It was short-lived. By Dec 2, we saw institutions market-wide assaying portfolio risk and locking in higher derivatives insurance. The chips were gone.

Money sat back expectantly. On Dec 8, The House delivered chips as the European Central Bank lowered interest rates. That’s devaluing the euro. At first, cheapening the euro increases the value of the dollar – which lowers US stocks (a la Dec 8). But if you’d hedged with derivatives as most of the globe did, you bluffed The House. Plus, the Fed will likely have to follow Europe’s bet up with a see-and-raise to devalue the dollar back into line with the euro (expect it next week, but before options expirations).

In poker, having “the nuts” is holding the best cards, and knowing it. Central banks have given arbitragers the nuts. (more…)

A Rational View of Share Prices

Belated Happy Thanksgiving!

After breaking for a week as an act of giving thanks, we’re back. Karen and I joined 88,622 others in Aggieland at Kyle Field in College Station for the A&M football game last Thursday versus the Texas Longhorns. Disappointing outcome, great Thanksgiving.

There’s something special about Texas. People passing you on the street say hi and the kids say yes ma’am and yes sir. There’s a lot of what Kenny Chesney calls “the good stuff.” What may be the world’s greatest college bar, the Dixie Chicken, sits on the main College Station drag like an Old West saloon. Batwing doors, even.

Speaking of swinging doors, gyrations in markets make it awfully hard to use your stock price to measure investor sentiment (wasn’t that the idea behind exchanges?). In fact, there’s inherent contradiction between the way markets behave now and how the IR profession cultivates holders.

IR folks typically seek buy-and-hold money that does not trade. Yet executives frequently ask about the stock price. The news rushing at us round the clock tries to explain market behavior in rational terms. Yet stock prices are set by the latest fleeting bid or offer. Nine of ten times, those prices are not rational. (more…)