Take the Pulse of Your Stock

Coming to NIRI National 2011 next week? Please visit us at Booth 304! We have no helicopter rides or trips to the Bahamas to give, but we do have a really cool microfiber for keeping those ubiquitous touchscreen pads and smartphones sharp.

June launched by kicking markets right in the rump. We blamed economic data. It’s true but not that simple. Behind the data at the behavioral level, institutions decided against equities roughly May 13. We don’t make this up, we just observe it in the way trades execute. When methodologies, purposes or time horizons change, it manifests in trade executions.

Money didn’t hedge with options expirations May 18-20 either. If you decide not to insure your house against loss, what might that mean? That you expect to sell it shortly, that risk is nonexistent, or that insurance is too darned expensive. As an analogy, two of those three are negatives and the middle one doesn’t exist on Wall Street.

Here’s another example of behavioral signs. Russell indexes benchmarked against market caps on May 31. MSCI indexes for global quantitative diversification recalibrated the same day. What matters isn’t how they rejigger but what demand is reflected in algorithmic and speculative trading. Demand was terrible. Brokers overestimated demand and so shed excess shares June 1, crushing broad measures.

While bad economic data are a root cause for institutional wariness, it’s not that money woke up Wednesday June 1 and said: “Holy gray underwear, Batman, the economy is lousy!”

Every day, the collective We in the USA and the globe round take various economic temperatures. We watch retail sales reports, oil inventories, speeches by Fed rulers. We check jobs numbers. In our businesses we’re measuring cash flows, sales channels, balance sheets, income statements. We monitor our health with physicals and checkups (We just battered ourselves Sunday riding Elephant Rock).

Why would it be odd to do that with our traded shares? We in IR sometimes pay lots of lip service to market-structure stuff, but we still BEHAVE as though fundamentals are the only price-setting force. The best of the best in terms of rational investment behavior across our client base registers investment at about 16% of daily volume. If you don’t measure data and behavior, you won’t know what’s setting your price.

That’s what we do. We’re sort of the Redbook of stocks, the Fed survey of trading behaviors. We’re assessing different purposes and time horizons behind trading activity to provide a realistic, three-dimensional view of the health of your trading environment, and the role of investment versus noise or risk-management in setting price and driving volume.

By the way, we saw a marked increase in Speculative “over-valued” signals in trading last week for clients. It’s observable mathematically.

We’ll leave you with a scintillating market-structure tidbit. We saw a particular Asian bank program-trading a great number of securities the past three days. It could be that easing done around the Japanese earthquake in which yen were deployed to purchase securities and stabilize markets might now be reversing out.

Behaviors are the best measure of purpose. Life and trading do not happen in vacuums, and the IR pro who knows has a valuable advantage. It’s good to be cool in the IR chair. See you at NIRI!