Why do Analyst Days foster volatility?
For those unacquainted with Wall Street jargon, an “Analyst Day” is an event hosted by a public company to engage research analysts from the sellside, the firms selling stocks, and the buyside, shops buying stocks.
AMD held one yesterday. Short volume rose, price closed below midpoint and down, and the five-day pattern behind price and volume in AMD is all orange – Fast Trading machines. Quants, hedge funds, short volume were core day-over-day drivers.
Tim. You’re misunderstanding. Analyst Days are about promoting long-term shareholder value. Volatility is a necessary consequence.
The share of daily volume from Active Investment – stock-picking – in AMD has declined from a 200-day average of 10.9% to a five-day average of 9.8%. Passive money has also declined, from about 24.3%, 200-day average, to 20.5%. AMD is up about 70% over that time.
Certainly AMD is delivering alpha (and if you just owned it over 5.0 on a ten-point scale at EDGE, you could capture all gains with 30% less exposure to time).
Maybe the Analyst Day is aimed at reversing the decline in Active money?
Sure. But Morningstar data show that stock-pickers in large cap growth like AMD shares underperform the benchmark 98.5% of the time over the trailing decade. As a result, they are net sellers, not net buyers.
Doesn’t mean you stop telling the story. Does mean that the Board and c-suite should know the data.
Over the last five years, members of the S&P 500 have bought back $4.5 trillion of stock while over the same time the number of shares of SPY, the ETF tracking those stocks, has grown by nearly 13%. Even in 2022 when the index was down 18%, SPY shares outstanding grew 1%.
The point? SPY is the buyer. And by extension so are IVV (shares outstanding up 30%) and VOO (up 28% in five years), the same instruments from Blackrock and Vanguard.
Put those together and you can account for a significant amount of the increase in the aggregate price of the S&P 500.
Flows matter.
Which brings us to WHY Analyst Days – and earnings – cause volatility.
In a 2011 paper by Univ of Illinois professors Prachi Deuskar and Tim Johnson published in the Review of Financial Studies titled “Market Liquidity and Flow-Driven Risk” – Lord, just save me now from this hellish enterprise – there’s this:
“Flow-driven risk is time varying because price impact is highly variable.”
Stand by a gurgling brook. Picture a small one, flowing vigorously. Take a stone and place it in the stream. What happens?
The flow is interrupted. The water passing by the stone speeds up.
It’s a way to understand the impact of TIME – an event like your Analyst Day, your earnings report – on FLOWS.
Money is programmed. It “expects” to encounter what it met yesterday or over the last week. When it doesn’t, prices gyrate. Say it’s programmed to buy ten stocks and one of them is removed. The same flows hit nine. Prices gyrate.
It happened in the entire market Monday Nov 10. On Friday Nov 7, Active money rose 25% as a constituency (as our Brian Wilson noted and circulated internally to the team). Supply, Reg SHO Short Volume (with our proprietary treatment), declined.
The same flows from autonomous systems showed up Monday and the market skyrocketed. I described it to our EDGE users as the “Nancy Pelosi Effect.” It was like somebodies knew the government shutdown was over and bought stocks. Boom!
Well, hell. Quant funds can CALULATE that outcome in your stock when a time-varying event like an Analyst Day occurs.
For AMD, those forces increased by nearly 70% day over day and they were SHORT. Why? Flows are slowing. Introduce a boulder into the stream. Price will fall.
Maybe it’s a short-term event. Bu it gets baked into how money behaves.
Look at the planet’s markets. The same machines that price stocks in the USA set them everywhere (Jane Street has quite a mess still in India). Look at the Japanese Nikkei trading at a record and last year surpassing its 1989 high.
The Japanese economy is smaller now than it was then. It’s a fraction of its former contribution to the global total. Maybe it’s just valuing Softbank and Nvdia or whatever. But it’s the same combination. Flows. Prices. The money has got to go somewhere and the planet is awash in it.
The German DAX, at a record. The German economy is contracting and not larger than it was in 2019. Italy. Record stock market gains. Italy’s GDP isn’t materially different from 1999 when it left the lira.
My point? Money flows. It fills up the space and inflates prices. And when you hold events they are boulders in the stream causing prices to gyrate.
I’m not saying you should hold no events. But the amount of time the boulder is in the stream should be minimal. It can have lasting consequences.
And it’s why you absolutely should be measuring what the money is doing. And you should absolutely be doing things that capture flows, public companies.
Investors? Ride those flows. Get out when the flows slow.
