Tagged: Sentiment

Climbing Mountains

You’re welcome.

Had Karen and I not departed Sep 20 for Bavaria to ride bikes along the Alps, who knows what the market might have done?  There’s high statistical correlation between our debouchment abroad and a further surge for US stocks.

Stocks spent all of September above 5.5 on the 10-point ModernIR Sentiment Index. Money never paused, blowing through September expirations and defying statistics saying 80% of the time stocks decline when Sentiment peaks as derivatives lapse.

Were we committed to the interests of stock investors we’d pack our bags with laundered undergarments and return to Germany before the market stalls.

But is the market rational?

Univ. of Chicago professor Richard Thaler, who won the Nobel Prize this week for his work on behavioral economics, is as flummoxed as the rest by its disregard for risk. While Professor Thaler might skewer my certitude to knowledge quotient (you’ll have to read more about him to understand that one), I think I know why.

Machines act like people.  My Google Pixel phone constructed a very human montage of our visit to Rothenberg, a Franconian walled medieval city in the woods east of Mannheim.  I didn’t pick the photos or music. I turned on my phone the next day and it said here’s your movie.  (For awesome views of our trip click here, here, here and here.)

Google also classifies my photos by type – mountains, lakes, waterfalls, boats, cars, churches, flowers, farms, beer.

Don’t you suppose algorithms can do the same with stocks? We have long written about the capacity machines possess to make trading decisions, functionally no different than my Pixel’s facility with photographs.

For companies and investors watching headlines, it appears humans are responding.  If airline stocks are up because of good guidance from United Airlines and American, we suppose humans are doing it. But machines can use data to assemble a stock collage.

The way to sort humans from robots is by behavior. It’s subtle. If I sent around my phone’s Rothenberg Polka, where the only part I played was naming it, recipients would assume I chose photos and set them to music. Karen would look at it and say, “Get rid of that photo. I don’t like it.”

Subtleties are human. Central tendencies like flowers and waterfalls are well within machine purview. Machines don’t like or dislike things. They just mix and match.

Apply to stocks. It explains why the market is impervious to shootings, temblors, volcanic eruptions, hurricanes, geopolitical tension. Those aren’t in the algorithm.

Humans thus far uniquely grapple with fear and greed. A market that is neither greedy nor fearful is not rational. But it can climb mountains of doubt and confound game theorists. What we don’t know is how machines will treat mismatched data. We haven’t had much of it in over nine years.

Our Best Sentiments

Question: “Would you like more timely information about who owns your shares?”

Answer: Yes!

Question: “Would you be willing to ask for more timely information?”

Answer: Um…

Let’s change that “um” to a yes! You know about NIRI’s effort to shorten 13f reporting windows? Read about it here. All you have to do is fill out NIRI’s prepared template and email it to the address provided. There are 23 comment letters supporting the initiative as of March 5. With 1,600 companies in NIRI, we ought to be able to push the number up. See comment letters here: http://www.sec.gov/comments/4-659/4-659.shtml

This effort illustrates the difference between saying something and doing it (and there’s some serious doing here, which is great news!).

Speaking of which, TD Ameritrade is separating the chatter from the chart in its six million retail accounts with the TD Ameritrade IMX, an index showing what retail investors are thinking by tracking what they’re doing. Sentiment out this week for February was the best in stocks since June 2011.

Of course, one measure doth not a market make. We have an algorithm that looks for relative flows from retail money, and we saw more this period too. But other measures differed. As of March 5, Sentiment was 4.55, just below Neutral. We measure Sentiment by tracking relative changes in market-share for big behaviors and weighting that movement according to midpoint price-changes. It’s like a market-cap-weighted index. Statistically, 23% of clients had Negative market sentiment, 68% were Neutral, and 9% were Positive. (more…)

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…)