Tagged: portfolio window-dressing

Bare Windows

It’s window-dressing. 

That saying suggests effort to make something appear better than it is.  And it’s a hallmark of stocks in today’s Relative Value era where the principal way we determine the worth of things is by comparing them to other things (true of stocks, and houses, art, cars, bonds, etc.).

ModernIR clients know we talk about “window dressing” at the ends of months and quarters.  It gets short shrift in the news but the PATTERNS of money that we observe cast long shadows over headlines.

Every month, managers who send investors performance statements want stuff to look as good as it can.  Things get bought and sold.  Then the headline-writers root around for some reason, like the Fed chair testifying to Congress.

Even bigger is the money tracking benchmarks. Every month, every quarter, that money needs to get square with its targets.  If Tech is supposed to be 24% of my holdings, and at quarter-end it’s 27%, I’m selling Tech, and especially things that have just gone up, like SNAP.

So SNAP drops 7%.  What did your stock do yesterday?  There’s a reason, and it’s measurable in behavioral patterns. Market structure.

The reason yesterday in particular was so tough is because it was T+2, trade date plus two more days, to quarter-end. If you need to settle a trade, effect a change of ownership, and it’s a big basket you’re working through, you’ll do it three days from quarter-end to make sure all positions settle in time.

With tens of trillions of dollars benchmarked to indexes around the globe, it’s startling to me how little attention is paid to basic mechanics of the market, such as when index money recalibrates (different from periodic rebalances by index creators).

And realize this.  In the last month, half the S&P 500 corrected – dropped more than 10%. About 90% of the Russell 2000 did.  No wonder small caps were up sharply Monday.  Most indexes were underweight those. But they’re less than 10% of overall market cap (closer to 5% than 10%). Truing up is a one-day trade.

Tech is a different story. Five stocks are almost 25% of the S&P 500 (AAPL, AMZN, GOOG, FB, MSFT).  And technology stocks woven through Consumer Discretionary and Communication Services stretch the effects of Tech north of 40%, approaching half the $50 trillion of US market cap.

The wonder is we don’t take it on the chin more often. I think the reason is derivatives. There’s a tendency to rely on substitutes rather than go through the hassle of buying and selling stocks.

As I’ve explained before, this is both the beauty and ugliness of Exchange Traded Funds (ETFs). They’re substitutes. They take the place of stocks, relieving the market of the…unpleasantness of moving real assets.  ETFs are just bits of digital paper that can be manufactured and destroyed at whim.

Remember, ETFs were created by commodity traders who thought, “Wouldn’t it be cool if we didn’t have to get out the forklift and move all that stuff in the commodity warehouse? What if we could just trade warehouse RECEIPTS instead of dragging a pallet of copper around?”

This time the forklifts are out.  It’s been coming since April.  See the image here? That’s Broad Sentiment, our 10-point index of waxing and waning demand for S&P 500 stocks, year-to-date in 2021, vs SPY, the S&P 500 ETF.  SPY is just 2.8% above its high point when Sentiment lost its mojo in April.

Broad Sentiment, courtesy MarketstructureEDGE.com

From Mar 2020 to Apr 2021, we had a momentum market juiced by time and money. There were surfeits of both during the pandemic. People gambled. Money gushed. Stocks zoomed.

But as with all drugs, the effect wears off.  Sentiment peaked in March. Strong stocks notwithstanding, we’ve been coming off a drug-induced high since then.

And the twitches have begun. You see it first in derivatives.  Every expirations period since April has bumped – before, during or right after.  I’ve circled them on the image. It means the cold shakes could come next.  Not saying they will. All analogies break down.

Back to window-dressing.  When it gets hard to dress up the room no matter what curtains you hang, it means something.  Here we are, on the doorstep of Q4 2021.  It’s possible the market, or a benchmark or two, might’ve turned negative for the third calendar quarter yesterday (I’m writing before the market closes).

The RISK can be seen by observing movement in Passive money.  Because it’s the biggest thing in the market.  The windows are bare this time. If we were smart, we’d take a good look around.

But that’s probably too optimistic.  Governments and central banks will try again to slap on the coverings, dress it up, make it look better than it is.

Yin and Yang in Your Stock

Stocks go up and down. Nothing new there.

The dollar dropped for a second straight day today. Stocks are again up, like they were yesterday. The dollar gained ground last Wed-Fri, and stocks fell.

This week marks the end of the month and quarter. We recommend in our IR Calendar that you consider some tactical timing as part of your overall IR strategy. Generally, the last few trading days of a quarter or month aren’t best for releasing good news. But they may be perfect for bad news.

Why? Institutions will be shoring up portfolio returns or managing exposure to market risk. They address risk by offsetting it with something that is inversely correlated. Notice that stocks and the dollar are inversely correlated. Notice that the dollar and other currencies, such as the Euro, are often inversely correlated. (more…)