Tagged: sector

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.