Search Results for: headlines

Rise and Fall

The stock market last week posted its best day since 2020 and gave it back.

Why?

And why does your stock rise while another falls, and how do stocks trade today?

I’m glad you asked!

A week ago on Feb 23, the market moved clear of February derivatives-expirations.  Stocks surged. Then index futures expired Feb 28. Stocks swooned (the event isn’t neat but spills over the vessel either side).

The mechanics of those moves are forms of arbitrage. There are two parties to both, and at least one hedges exposure, compounding both market volume and volatility.

Tim, it’s Ukraine, you say.

Has your investment plan changed?

In my adult life, never have TV images of invading forces been other than Americans.

Hm.

All money tracking a benchmark or model depends to some degree on futures contracts. Using futures, passive money transfers responsibility for holding the right components in the right amounts at month-end to banks.

Banks like Goldman Sachs in turn mitigate exposure by buying, selling, shorting, stocks.

That tumult just happened.

Ukraine? The Federal Reserve? War? Inflation? Earnings?

Illustration 67216931 © Thelightwriter | Dreamstime.com

Risk and uncertainty affect markets, yes. But gyrations aren’t the juking and jiving of investors. It’s hedging and arbitrage.

(Editorial note: For more on that topic, here’s a list from The Map).

What you get from your stock exchange daily, public companies, is the same wherever you’re listed. It’s peer, sector, industry, performance; broad measures, market commentary, the dollar, gold, oil. Now maybe crypto. When appropriate, stuff on wars and rumors of wars.

Same that I received as an investor-relations officer in 2001.  Why no change? No reason. No one cares.

Anyway, it’s only possible for your stock to behave the same as your peers if the characteristics are the same. Liquidity, supply, demand, behavior.

CEOs think, “My stock’s down, my peer is up, investors are buying them, not me.”

The math says no. The stock market is like every market. There are supply-chain disruptions. Demand fluctuations.

The average trade-size in S&P 500 components last week was 98 shares – less than the regulatory minimum bid or offer of 100 shares, lowest we’ve marked. So prices are unseen till afterward.

If a market order – a trade without a price – is 100 or fewer shares, the law of the stock market says it must be filled. Now.

So. Either the broker receiving the trade can automatically route it away to somebody else, or they’ve got to buy or sell the stock.

Don’t ponder the risk implications. Your head will explode. Stay with me here.

It gets to why the stock market does things you don’t expect, why your stock doesn’t trade as you suppose.

That trade I just described? It’s filled even if no actual buyer or seller exists (part of the reason you can’t track what sets your price with settlement data. Doesn’t work anymore.).

It’s the law. Market-makers are exempt from locating shares to short.

The machines, the algorithms, are programmed to know this fact. They change the price.

Tim, I don’t get it. What are you saying?

That it’s most times not about you. And you should know what it IS.

Your CEO asks, “How come our stock was down and so-and-so, our closest peer, was up? What investor is buying them and not us?”

Statistically, 90% of the time it’s supply/demand or liquidity differences and not some investor picking your peer.

Last week in the S&P 500, the average stock traded 60,000 times daily, up 50% from long-term averages.  Intraday volatility – spread between high and low – was 3.6%.  Average dollars/trade was $17,000 and index stocks traded $1 billion daily.

The median is about $9,000/trade. To be in the top thousand marketwide, where 95% of the money is, you’ve got to trade $4,200 at a time.

Back up 200 days and it was $5,000.

You got that, IR people? It speaks to what investors can BUY. Or sell. What are your stock’s liquidity characteristics?

The best three S&P 500 stocks the past five days:

ETSY the last five days: 130,000 trades/day, $9,000/trade, dollars/day, $1.2 billion. Computerized speculation led gains, and Demand was bottomed, Supply was extreme and created a short-squeeze.

ENPH:  66,000 trades/day, $8,000/trade, dollars/day was $530 million. Computerized trading led ENPH too. Demand was bottomed, Supply was on trend.

MOS: 90,000 trades/day, $6,000/trade, dollars/day, $530 million. Active Investment was the lead behavior, and Demand rose while Supply fell.

Wouldn’t you want to know this stuff? We have more, including all the trends.

Why isn’t every public company measuring these data? Dunno. Mystery.

But. We’re going to democratize it. All public companies can and should know these data, and we’ll open that door.  Stay tuned.  

Cliffside

I took a screenshot yesterday at 2:22pm, on Feb 22, 2022. 

Sign from God? Turning point? Hogwash?

Those are better than most proffered reasons for the stock market’s moves.

Lately it’s been delivering pain. Blame goes to Ukraine, where the Gross Domestic Product of about $155 billion is 40% of Apple’s 2021 revenue. Way under Denver’s $200 billion GDP. A tenth of Russia’s.

Illustration 45324873 © Iqoncept | Dreamstime.com

Ukraine is not destabilizing global stocks. Numbers help us understand things.  The numbers don’t add up, without offense, for Ukraine.

So, why are stocks falling? Answering why is like explaining what causes earthquakes: We understand they’re products of mathematical facts insinuated into our dirt.

Well, mathematical facts shape equity markets too, and the construction emanates from the USA and its 40% share of the total global equity market.

Anybody remember the Flash CrashFlash orders?  Books were written. Investigations convened.  Congressional hearings held.  MSM’s good friend Joe Saluzzi was on CBS 60 Minutes describing how the stock market works.

We seem to have forgotten. 

Now the Department of Justice is probing short-selling.  The SEC is investigating block trades.

For God’s sake.

The block market that should be investigated is the off-market one where Exchange Traded Funds are created in huge, swapped block trades of stock without competition, taxes, or commissions. The SEC is fine with that. Approved it.

The short-selling needing investigating is the market-maker exemption from short-locate rules that powers the stock market.  Academic studies claiming clouds of short-selling around big declines lack comprehension of how the stock market works.

The SEC knows how it works. I doubt the DOJ does. 

Everybody wants to find that volatility springs from nefarious intent. Greedy people. Cheats.

No, it’s the rules. The SEC publishes data on cancelled trades – legal spoofing.  That’s the MIDAS system, built for the SEC by a high-frequency trader.

People have gone to jail for what’s a fundamental fact of market function. The truth is, most orders are cancelled.  How can you parse what’s legal or not when the market is stuffed with behaviors that if separated by label or exemption move from illegal to legal?

Something should be wrong, or not.  Don’t lie. Don’t steal. Don’t cheat.  The Ten Commandments are simple.

When you say, “Don’t cheat – unless you’re a market-maker,” your stock market is already a disaster in the making.  People won’t understand why prices go up or down.

Here’s some math.  The average trade-size in the stock market – shares trading hands at a time – is down more than 50% since 2016.  It dropped 10% just in the past 200 days in the S&P 500.

The average S&P 500 stock trades 100 shares at a time, data ModernIR tracks show. That’s exactly the regulatory minimum for quoting a bid or offer.

Meanwhile, the number of trades daily is up more than 20% from a 200-day average of 40,000 trades daily per S&P 500 component to nearly 50,000 in the last five trading days.

Oh, and roughly 48% of all stock volume the last five days was SHORT (vs about 45% 200-day average).

And the DOJ is investigating short-selling.

Combine stocks and ETFs and 90% of trades are cancelled. Over 90% of all short-selling is sanctioned, exempted market-making – firms making stock up out of thin air to keep all those 100-share trades happening.

The DOJ is searching for a private-sector speck while a beam protrudes from the all-seeing government eye.

Do we want a stock market that gives you 100 shares that might not exist? Or a stock market that reflects reality?  People don’t even know.  You can’t have both.  The SEC simply hasn’t explained to anybody this Hobson’s Choice.

The principal stock buyers and sellers embed their computers in every tradable market on the planet, and all the machines share instant information. They’re 50% of volume. That’s why equities rise and fall in relative global uniformity (not perfectly – there are always asymmetries to exploit).

Machines identify breakdowns in supply and demand and magnify them. Stock exchange IEX made famous by Michael Lewis’s book Flash Boys calls it “crumbling quotes.”  The stock market becomes like California cliffsides.  It…dissolves.

Investigations are wasted time.  Constant scrutiny of headlines and fundamentals for meaning behind the market’s moves is mostly pointless.

I’m not saying nothing matters. But the central tendency, the principal answer, is market structure.

I could also say math signals gains next, and also says stocks are down because momentum died in Jun/Jul 2021. Another story.

There’s just one thing wrong with the stock market.  Its singular purpose is the perpetuation of continuous activity.  When activity hiccups, the market crumbles like a California cliffside.

The rest is confusing busy with productive.

And that’s why if you’re a trader or public company in the stock market, and you don’t spend SOME time understanding how it works, you’re on that cliffside.

Uneven Market

My advice?

When the market gets tough, go sailing.  Heck, go sailing when stocks are soaring.  I recommend it.

If you missed the Market Structure Map, we were on hiatus the past two weeks whilst undulating via catamaran over azure seas along the Sir Francis Drake Channel, sailing the whole of the British Virgin Islands from Jost Van Dyke to Anegada.

This photo below is in The Bight where lies the famous Willy T at anchor, off Norman Island.  You can get used to bare feet, tides, the absence of time save the rising and setting sun.

Photo courtesy Tim Quast

I had time to read Raj Rajaratnam’s new book, Uneven Justice, mostly on the long flights there and back.  I lived for a year in Sri Lanka during college, from whence he hails.

You colleagues long in the capital markets will remember the 2009 arrest of the Galleon hedge-fund founder for insider trading. 

The book is repetitive, has some copy-editing shortcomings. But it’s a remarkable read and I recommend it.  If you like the HBO show Billions, you’ll appreciate the sordid conniving by the attorney for the Southern District of New York, Preet Bharara.

I’ve long thought insider-trading was a mushy “crime.” You may disagree. I think Rajaratnam does a creditable job establishing that he committed no insider trading, whatever one thinks of it.

(I understand the stock market and here’s my issue: All high-frequency traders are armed with material nonpublic information called proprietary data, from which they generate ALL their profits.  And investment, public and private, is a continuous pursuit of what others don’t know, or overlook. To criminalize subjective aspects while permitting the vast sea of the rest is nonsensical and cognitively dissonant.)

This isn’t a book review.  Read it and draw your own conclusions.  But Raj Rajaratnam’s jury could not comprehend how the stock market worked. 

Heck, the attorneys didn’t understand it! The judge didn’t understand it. 

Try explaining to a jury of moms and pops (I can’t tell you how many times I’ve gotten the blink-blink explaining a continuous auction market) how a hedge fund works, the buyside, the sellside, what drives trading decisions, interaction with investor relations departments and corporate execs, the bets and gambles on beats and misses at earnings, the relentless thrum of information everywhere.

The defense team presented vast reams of data illustrating how Galleon developed its investment ideas, all of which traced back to colossal volumes of trading records. The firm managed about $8 billion of assets but traded over $170 BILLION in a year.

The government took issue with 0.01% of trades that by Galleon’s math resulted in a loss. But the prosecution simply said, “This Wall Street billionaire who caused the Financial Crisis is a cheat, and these wiretap snippets prove it.”

Again, draw your own conclusions.  But it resonated with me because there’s a pervasive propensity in the stock market to choose the easy snippet over grasping how it works.

Take for instance the market’s struggle since Jan 5, when we left for Tortola and the trade winds.  The easy explanation is we caused it.  I mean, it coincided, right?

I’m joking but you get the point.

The prevailing trope is Tech stocks are falling as investors wrestle with when the Fed will hike rates.

Years of trailing data show no clear correlation between interest rates and how Tech performs. It’s not difficult analysis.  Check the ten-year data for XLK. Compare to your favorite measure for interest rates, such as DXY or GLD.

There IS, however, correlation between periods of strong gains for Tech, and subsequent pullbacks.  There are just three of those for Tech the past decade:  latter 2018 (spilling into 2019), the Pandemic (spring 2020), and late 2021 (spilling into 2022).

These data suggest that save for Pandemics, investors in retirement accounts get overweight equities and especially Tech, and they recalibrate, especially in the fourth quarter.

Consequences rise as Tech gets bigger and bigger and bigger. Recalibrations rumble through how Fast Traders set 60% of prices and how derivatives underpin 20% of market cap, and how Short Volume (the supply chain), surges or stalls.

And then it starts over.  At some point, it won’t, sure. But the cause will be larger than hypothetical interest-rate hand-wringing.

And public companies, it’s measurable. Take AAPL, world’s biggest stock. Between Oct 1, 2018 and Jan 29, 2019, AAPL was never a 10.0 on our ten-point Demand scale.  Between Feb 28-Apr 15, 2020, it was not a 10.0.

And now? AAPL last had ceiling-rattling 10.0 Demand Dec 16. It’s now a 2.6 and bottomed. Right on schedule.

These are the facts, and the math. Headlines are not. Keep that in mind as earnings kick off. You can do what you’ve always done, the easy course. Or you can be armed with facts and details.  We have them.

Big Strategy

Let’s have a show of hands. 

How many of you think investors woke up, several pounds heavier, the day after Thanksgiving, and opened a browser up to news out of South Africa, and said, “Shazam! Omicron!” And dumped their equities?

Second question, how many of you say that on Monday, Dec 6, investors said, “Screw it, this omicron thing is crap. Buy!” And stocks soared?

If we had a poll on our polls, I’d bet not 30% would have raised hands on either question.

So, why did the headlines say that?  And a step further, if we don’t believe humans knee-jerked the market around the past week, why suppose humans are doing it other times?

Quast, where are you going with this? What do you want us to say? 

I’d like us to come to terms as investors and public companies with the presence of automated trading strategies capable of acting

Illustration 22077880 © Skypixel | Dreamstime.com

independently.  Not as a side show, a reaction.  As valid as Ben Graham’s Intelligent Investor. Ron Baron picking stocks.

Blackrock runs over a thousand funds, the bulk of which follow mathematical models having little directly to do with earnings multiples.  Blackrock, Vanguard, State Street and Fidelity run $20 trillion of assets, most of it passive.

Yet many believe investment models follow the market, and the market is priced by rational thought. 

Why would one think stocks are priced by rational thought?  Give me data to support that view. They trade more? They own more?

Neither of those is true. My long-only investors twenty years ago were generally buy-and-hold.  Are your top 20 core Active holders in and out all the time?  Course not.

The stock market today is 100% electronic, close to 95% algorithmic, and nearly all prices are products of software. So it’s the opposite then. Buy-and-hold investors are accepting prices set by others.

A week ago Olin Corp. (OLN), the world’s largest chlorine company and owner of the Winchester arms brand, was trading near $65. Last Friday it touched $51, and now it’s back to $58. It dropped 22%, a spread of 28% from best to worst.

Anything to do with the fundamentals of Olin’s business? Active money never changed its mind, valuing OLN about $61 since early November (that’s as measurable as any other behavioral factor behind price and volume, by the way. We call it Rational Price.).

It’s volatility, Tim. Noise. 

If we’re willing to characterize a 20% change in price over a week as noise, we’re saying the stock market is a steaming pile of pooh.  A real market wouldn’t do that.

But what if it’s not pooh?  Suppose it’s a strategy that performs best when demand and supply alike both fall?

Then that strategy deserves the same level of treatment in what drives shareholder value as company fundamentals. 

Do you see where I’m going?  The hubris of business news is its fruitless pursuit of human reason as the explanation for everything happening in the stock market.  And it’s the hubris of investor relations too.

Do you know Exchange Traded Funds have created and redeemed nearly $6 trillion of shares in 2021, in US equities alone (data from the Investment Company Institute)?  Nothing to do with corporate fundamentals. All about supply and demand for equities.

Bank of America said last month flows to equities globally have topped $1.1 trillion, crushing all previous records by more than 200%. Most of that money is going to model-driven funds (and 60% to US equities).

Intermediating equity flows all the time, everywhere, are high-speed trading firms like Citadel Securities, Virtu, Hudson River Trading, Two Sigma, Infinium, Optiv, GTS, Quantlab, Tower Research, Jane Street, DE Shaw, DRW Trading and a handful of others.

They follow real methods, with actual tactics and strategies.  ModernIR models show these trading schemes were 54% of trading volume the past week in S&P 500 stocks. Derivatives, a key market for Fast Traders, traced to 18% of equity volume.  About 19% was Passive models like Blackrock’s ETFs.

That leaves about 9% from Active money, your core long-only investors. 

So, what drove the stock market up and down? On a probability basis alone, it’s the 54%. 

It’s not the same everywhere, but the principle applies. For NVS Nov 18-Dec 6, 38% was Passive, just 31% Fast Trading – those machines.  For TSLA, 57% was Fast Trading, 17% from Passives.

For the record, OLN was 54% Fast Trading, 19% Passive, in step with the S&P 500.

Moral of the story?  No view of the market should ever exclude the 54%. Nor should it be seen as noise. It’s a strategy. The difference is it’s driven by Price as an end, not financial returns as an end. (If you want to know your company’s behavioral mix, ask us.)

And it’s the most successful investment strategy in the market.  That should concern you. But that’s a whole other story about the way stocks trade.

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.

Are You 2.0?

Are you 2.0?

I know.  You’re tired of clichés.

Especially in a pandemic that birthed a lexicography – social distancing, mask-up, nonessential, emergency executive orders, comorbidity.

After all that, you don’t want to hear you’re 1.0, not 2.0.

On the other hand, I’m notorious for not wanting to upgrade. I’ll stay 1.0 rather than risk 2.0 jacking up the performance of some app.  An update downloads, and now I can’t connect to the printer.  Been through that?

So has the investor-relations profession.

Aside:  Investors, you’re getting a ringside seat. IR, as we call it, is the liaison between public companies and Wall Street. A painful evolution from 1.0. to 2.0 is underway.

In the 1970s you had a rotary phone on your desk and you called investors. IR 1.0 is telling the story.

The IR profession formalized by association in 1969 with the advent of the National Investor Relations Institute (NIRI).  I’m currently on the national board representing service providers. A year from now, I’ll hand off that baton to our next emissary.

IR Era 1.0 lasted from 1969 till 2005 when Regulation National Market System changed the market. Telling the story was the chief function of IR for more than 35 years.

If you don’t know Reg NMS, read this.

Continuing, I had the honor of vice-chairing the 50th Anniversary NIRI Annual Conference in 2019, in Phoenix.  Back when people innocently shook hands, hugged, packed conference halls.  We had famed stock-picker Lee Cooperman, market-structure expert Joe Saluzzi of Themis Trading, SEC head of Trading and Markets Brett Redfearn.

We were standing there looking at IR 2.0. Man, that was fun.

I doubt we’ll dispute rotary phones are obsolete.  Sure, we’ve got ringtones that sound like them. But punching buttons is easier.

Speaking of easy, attending the NIRI 2020 Annual Conference is easier than a button. And it’s upon us.  We’ve spent a long time apart.  Socially distanced, I guess. While that continues at the AC, we can still be virtually together. I’ll be there.

Come join me!  It’s simple. Go here and register (you’d spend a lot more on hotel rooms – and we had sponsored your keys at the Miami Fontainebleau, by the way. Sigh. Ah well.) and instead of checking in to a room, check out the schedule.

Come see our Express Talk. See our two-minute video called, “What Do I Do With It?” See the 2021 IR Planning Calendar to help you navigate the minefield of derivatives expirations when you report results (don’t blow a limb off your story. So to speak.).

I just watched our Express Talk.  I look rough in the first clip – like I’ve been through a Pandemic. I’m cleaned up in the next, even wearing a tie. Then I’m settled in by clip three to share what matters about IR 2.0.

Come view them. Support our community.  After all, 2020 is going to end, despite indications at times this year that it never would. We’re almost there!

Back to IR 2.0.  Understand this: Our profession is a data enterprise now. Not a phone-dialer, meeting-setter.  There’s financial data (your story), ESG data (governance), Alt data (what the buyside is really tracking, like jobs, credit card transactions, port-of-entry satellite views).

And there’s Market Structure. This is the only measure that’ll tell you what sets price. If Activism threats exist. When Passive money rotates. If it’s about your story. How to run buybacks. What happens when you spin off a unit. The best time to issue stock. How deal arbs bet on outcomes (and if they think you’re about to do a deal). What drives shareholder value.

I’ll repeat that.  It’s the only measure that tells you what drives shareholder value. Headlines and financials don’t. Buyers and sellers of stock do.

Do you want to pick up the phone and call people?  Or do you want to advise the executive team and the board?

Okay. IR 2.0 is not for everyone. Some of us just belong in IR 1.0. Give me a desk and a phone and let me call people and convince myself that it matters.

Have at it.

But that’s yesterday. It’s an infinitesimal speck (like a virus) of today’s job. And even dialing should be guided by data, measured by data.

It’s almost 2021. I know the mullet is trying to make a comeback. I know I listen to 80s music.  But that’s no reason to do the IR job like it’s 1984.  Don’t do that. It’s not a good look.

Come see ModernIR and the rest of the vendor community (there are 22 others with us in the virtual exhibit hall) at this year’s disruptive event, the NIRI Annual Conference. See you there.

And let’s start 2021 with good hair and good data.

On the Skids

If electoral processes lack the drama to satisfy you, check the stock market.

Intraday volatility has been averaging 4%. The pandemic has so desensitized us to gyrations that what once was appalling (volatility over 2%) is now a Sunday T-shirt.

Who cares?

Public companies, your market-cap can change 4% any given day. And a lot more, as we saw this week.  And traders, how or when you buy or sell can be the difference between gains and losses.

So why are prices unstable?

For one, trade-size is tiny.  In 1995, data show orders averaged 1,600 shares. Today it’s 130 shares, a 92% drop.

The exchanges shout, “There’s more to market quality!”

Shoulder past that obfuscating rhetoric. Tiny trades foster volatility because the price changes more often.

You follow?  If the price was $50 per share for 1,600 shares 25 years ago, and today it’s $50 for 130 shares, then $50.02 for 130 shares, then $49.98 for 130 shares, then $50.10 for 130 shares – and so on – the point isn’t whether the prices are pennies apart.

The point is those chasing pennies love this market and so become vast in it. But they’re not investors.  About 54% of current volume comes from that group (really, they want hundredths of pennies now).

Anything wrong with that?

Public companies, it demolishes the link between your story and your stock. You look to the market for what investors think. Instead it’s an arbitrage gauge. I cannot imagine a more impactful fact.

Traders, you can’t trust prices – the very thing you trade. (You should trade Sentiment.)

But wait, there’s more.

How often do you use a credit or debit card?  Parts of the world are going cashless, economies shifting to invisible reliance on a “middle man,” somebody always between the buying or selling.

I’m not knocking the merits of digital exchange. I’m reading Modern Monetary Theory economist Stephanie Kelton’s book, The Deficit Myth.  We can talk about credit and currency-creation another time when we have less stuff stewing our collective insides.

We’re talking about volatility. Why stocks like ETSY and BYND were halted on wild swings this week despite trading hundreds of millions of dollars of stock daily.

Sure, there were headlines. But why massive moves instead of, say, 2%?

The stock market shares characteristics with the global payments system.  Remember the 2008 financial crisis? What worried Ben Bernanke, Tim Geithner and Hank Paulson to grayness was a possibility the plumbing behind electronic transactions might run dry.

Well, about 45% of US stock volume is borrowed. It’s a payments system. A cashless society. Parties chasing pennies don’t want to own things, and avoid that by borrowing. Covering borrowing by day’s end makes you Flat, it’s called.

And there are derivatives. Think of these as shares on a layaway plan.  Stuff people plan to buy on time but might not.

Step forward to Monday, Nov 9. Dow up 1700 points to start. It’s a massive “rotation trade,” we’re told, from stay-at-home stocks to the open-up trade.

No, it was a temporary failure of the market’s payments system. Shorting plunged, dropping about 4% in a day, a staggering move across more than $30 trillion of market-cap. Derivatives trades declined 5% as “layaways” vanished.  That’s implied money.

Bernanke, Geithner and Paulson would have quailed.

Think of it this way. Traders after pennies want prices to change rapidly, but they don’t want to own anything. They borrow stock and buy and sell on layaway.  They’re more than 50% of volume, and borrowing is 45%, derivatives about 13%.

There’s crossover – but suppose that’s 108% of volume – everything, plus more.

That’s the grease under the skids of the world’s greatest equity market.

Lower it by 10% – the drop in short volume and derivatives trades. The market can’t function properly. Metal meets metal, screeching. Tumult ensues.

These payment seizures are routine, and behind the caroming behavior of markets. It’s not rational – but it’s measurable.  And what IS rational can be sorted out, your success measures amid the screaming skids of a tenuous market structure.

Your board and exec team need to know the success measures and the facts of market function, both. They count on you, investor-relations professionals. You can’t just talk story and ESG. It’s utterly inaccurate. We can help.

Traders, without market structure analytics, you’re trading like cavemen. Let us help.

By the way, the data do NOT show a repudiation of Tech. It’s not possible. Tech sprinkled through three sectors is 50% of market-cap. Passive money must have it.

No need for all of us to be on the skids.  Use data.  We have it.

-Tim Quast

Placid

The data are more placid than the people.

When next we write, elections will be over. We may still be waiting for the data but we’ll have had an election. Good data is everything.  Story for another time.

The story now is how’s money behaving before The Big Vote? Depends what’s meant by “behave.” The Wall Street Journal wrote for weeks that traders saw election turmoil:

-Aug 16:  “Traders Brace for Haywire Markets Around Presidential Election.” 

-Sep 27: “Investors Ramp Up Bets on Market Turmoil Around Election.”

-Oct 3: “Investors Can Take Refuge from Election Volatility.”

Then the WSJ’s Gunjan Banerji wrote yesterday (subscription required) that volatility bets have turned bearish – now “low vol” rather than higher volatility. Markets see a big Biden stimulus coming.

It’s a probable political outcome.

However.

The shift in bets may be about prices, not outcomes.  When there is a probability somebody will pay you more for a volatility bet than you paid somebody else for it, bets on volatility soar.  It hits a nexus and reverses. Bets are ends unto themselves.

On Oct 26, S&P Global Market Intelligence offered a view titled, “Hedging costs surge as investors brace for uncertain election outcome.”

It says costs for hedges have soared. And further, bets on dour markets are far more pronounced in 2021, implying to the authors that the market fears Covid19 resurgence more than election outcomes.

Two days, two diametric opposites.

There’s the trouble. Behaviors are often beheld, not beatified.

One of our favorite targets here in the Market Structure Map, as you longtime readers know, is the propensity among observers to treat all options action as rational. The truth is 90% of options expire unused because they are placeholders, bets on how prices change, substitutes. They don’t mean what people think.

S&P Global says the cost of S&P 500 puts has risen by 50% ahead of the election. Yet it also notes the open interest ratio – difference between the amount contracts people want to create versus the number they want to close out – is much higher in 2021 than it is around the election.

The put/call ratio can be nothing more than profiting on imbalances. And what behavior is responsible for an imbalance, valid or not? Enter Market Structure Analytics, our forte.  You can’t look at things like volume, prices, open interest, cost, etc., in a vacuum.

Let me explain. Suppose we say, “There is a serious national security threat from a foreign nation.”

Well, if the foreign nation is Switzerland, we laugh. It’s neutral. Has been for eons.  If it’s China or Iran, hair stands up.

Context matters. I said the behaviors were more placid than the people. I mean the voters are more agitated than the money in US equities.

Standard deviation – call it degree of change – is much higher in the long-run data for all behaviors, by 20% to more than 130%, than in October or the trailing 30 trading days back before September options-expirations.

Meaning? Eye of the beholder. Could be nothing. Could mean money sees no change.

Remember, there are four reasons, not one, for why money buys or sells. Investment, asset-allocation, speculation, taking or managing risk. None of these shares an endpoint.

Active money is the most agitated and even it is subdued. But it’s sold more than bought since Sep 2.  I think it means people read the stuff other people write and become fearful. It’s not predictive.

The other three behaviors show diminished responsiveness.  Yes, even risk management.

I could read that to mean the machines that do things don’t see anything changing.  The machines may be right in more ways than one! The more things change, the more they stay the same.

One thing I know for sure. I’ve illustrated how headlines don’t know what’s coming.  It’s why investor-relations and investment alike should not depend on them.

The data, however, do know.  And every investor, every public company, should be metering behavior, be it volatile or placid. We have that data.  I just told you what it showed.

Now, we’ll see what it says.

Oh, and this is placid to me, the Yampa River in CO, anytime of the year, and this is Oct 27, 2020.

What’s In It

We rode the Colorado National Monument this week with our good friends from Sun Valley. There’s a lesson in it about life and stocks both.

We would’ve been riding bikes in Puglia with them now, if not for this pandemic.  Oh, and part of the lesson learned is in Telluride.

Stay with me.  I’ll explain.

So we learned Sun Valley is comprised of four towns.  Sun Valley, Ketchum, Hailey and Bellevue. Each has its own mayor, own government.  It could be one united town, but no.

There’s a point.  While you ponder that, let me give you some background.

Karen and I wandered from Denver to Glenwood Springs (rode bikes, ate great food, soaked in hot springs, at this energetic little burg favored by Wyatt Earp and Doc Holliday), and on to Grand Junction (pedaled the Monument and bunked at the lovely Hotel Maverick on the campus of Colorado Mesa University).

We then migrated to Moab and hiked Canyonlands and cycled the Potash Highway where evidence remains of a civilization once living in paradise on the Colorado River (if your etched recreations of yourselves in sandstone reflect jewelry and wildly stylish hair, you’re well up the actualization hierarchy from basic sustenance).

We next traversed the remote stretch from there to Telluride, a dramatic geological shift. The little city in a box canyon lighted by Nikola Tesla and robbed by Butch Cassidy is a swanky spot at the end of the road.  Wow.  I get it.  Oprah. Tom Cruise. Ralph Lauren. It looks like their town.

Or towns, rather.  Because here too as in Idaho there are cities a couple miles apart with two mayors, two governments. There’s Telluride, CO, in the valley. There’s Mountain Village, CO, up above (where no expense has been spared – you cannot find a tool shed that’s a shack).

And that’s the lesson. People talk about coming together.  Sun Valley can’t.  Telluride can’t.  Could it be humans are motivated by their own interests?

And how about money behind stocks?

More on that in a moment.

NIRI, the association for investor-relations professionals, has a 50-year history.  I’m on the national board representing service providers.  We were blindsided by the SEC this summer, which abruptly proposed changing the threshold for so-called 13Fs, named for the section of the Securities Act creating them.

Our profession depends on those filings to understand shareholdings.

The SEC said funds with less than $5 billion of assets would no longer have to file.  There goes insight into 90% of funds. The SEC never asked us.

You’re thinking, “There’s a hammer here, and a nail. Perhaps I’ll just pound it through my hand rather than continue reading.”

Don’t quit! You’re getting close.

Tip O’Neill and Ronald Reagan made deals. You youngsters, look it up.  There were “pork barrel politics,” a pejorative way to describe a quid pro quo.  Wait, is that a double negative?

Let me rephrase. Politicians used to do deals.  Give me something, I’ll give you something.  You can decry it but it’s human nature.  We don’t “come together” without a reason.

Sun Valley. Telluride. They haven’t yet found a reason to unite.

NIRI could learn. We can talk for ten years about why we deserve better data. There’s nothing in it for the other side. I bet if we said to the bulge bracket, the Goldman Sachses, the Morgan Stanleys, “You lose your corporate access until you help us get better data.”

Now both have skin in the game. Stuff gets done.

Most of us outside Jesus Christ, Mother Theresa, Martin Luther King, Jr and Mahatma Gandhi are motivated by what benefits us.

Shift to stocks.  Money with different purposes and time-horizons drives them.  The motivation for each is self-interest, not headlines or negotiations between Nancy Pelosi and Steven Mnuchin.

Let’s call it, “What’s In It for Me?” All the money is motivated by that.  Humans are similarly animated.  For most of the money in the market, what’s in it is a short-term return.

If you want to understand what motivates the money, you must understand self-interest.  You can learn it in Sun Valley or Telluride.  You can learn it watching politics. And it applies to stocks. Money wants returns. When that opportunity wanes, it leaves.

That’s it. No more complex. And ModernIR measures that motivation.  Ask us, and we’ll show you what’s in it for the money behind your shares.  Too bad we can’t figure it out in politics. It’s not that hard.

Seen and Unseen

The stock market is a story of the seen and the unseen.

Ethereal, hieratic, a walk by faith not by sight kind of thing?  No, not that.

And by the way, I’ve not forgotten about the rest of the story, as Paul Harvey (millennials, look him up) would say, the good developments for investors and public companies I mentioned some time back. I’ll come to it soon. This week there’s urgency.

A tug of war rages between bulls and bears. Some say stocks are wildly overpriced. There’s record bearishness on stocks in surveys of individual investors. Yet people are daytrading like it’s 1999.  And record stockpiles of cash like tumbleweeds on Kansas fences strain at the bounds, and the bulls say, “Just you wait and see when that money rolls into markets!”

All of this is seen stuff. Things we can observe.  As are promising clinical developments in steroids that might help severe coronavirus sufferers.  Rebounding retail sales. The Federal Reserve taking tickets at the market’s door.

None of those observable data points buy or sell stocks, though.  People and machines do.  In my Interactive Brokers account as I continue testing our new Market Structure EDGE decision-support platform for traders, I sold a thousand shares of AMRN yesterday.

It took me several hours, nine trades, all market orders, not limits. I’m cautious about limit orders because they’re in the pipeline for everyone intermediating flow to see.  Even so, only three matched at the best offer. The rest were mid-pointed in dark pools, and one on a midpoint algorithm priced worse, proof machines know the flow.

In a sense, 70% of the prices were unseen. Marketable trades have at least the advantage of surprise.  Heck, I’m convinced Fast Traders troll the quotes people look up.

Now, why should you care, public companies and investors?

Because the unseen is bigger than the seen. This cat-and-mouse game is suffusing hundreds of billions of dollars of volume daily.  It’s a battle over who knows what, and what is seen is always at a disadvantage to those with speed and data in the unseen.

There are fast and slow prices, and the investing public is always slow.  There are quotes in 100-share increments, yet well more than 50% of trades are odd lots less than that.

There are changes coming, thankfully. More on that in a couple weeks.  What’s coming this week is our bigger concern, and it’s a case of seen versus unseen.

Today VIX options expire (See ModernIR planning calendar).  There are three ways to win or lose: You can buy stocks in hopes they rise, short them on belief they’ll fall – or trade the spread. Volatility. It’s a Pandemic obsession. Inexperienced traders have discovered grand profits in chasing the implied volatility reflected in options.  I hope it doesn’t end badly.

Volatility bets will recalibrate today. The timer goes off, and the clock resets and the game begins again.

Thursday brings the expiration of a set of index options, substitutes for stocks in the benchmark.  Many option the index rather than buy its components.

Friday is quad-witching when broad stock and index options and futures expire (and derivatives tied to currencies, interest rates, Treasurys, which have been volatile).

The first quad-witch of 2020 Mar 20 marked the bottom (so far) of the Pandemic Correction. And wiped out some veteran derivatives traders.  We’re coming into this one like a fighter jet attempting a carrier landing, with the longest positive stretch we’ve ever recorded for Market Structure Sentiment™, our 10-point gauge of short-term tops and bottoms.

It’s at 8.2. Stocks most times trade between 4.0-6.0. It’s screaming on the ceiling, showering metal sparks like skyrockets.

And beneath lurks a leviathan, not unseen but uncertain, a shadowy and shifting monster of indefinite dimension.

Index rebalances.

IR Magazine’s Tim Human wrote on ramifications for public companies, an excellent treatise despite my appearance in it.

Big indexers S&P Dow Jones, Nasdaq and MSCI haven’t reconstituted benchmarks this year. The last one done was in December.  Staggering volatility was ripping markets in March when they were slated and so they were delayed, a historical first, till June.

Volatility is back as we approach resets affecting nearly $20 trillion tracking dollars.

And guess what?  The big FTSE Russell annual reconstitution impacting another $9 trillion is underway now in phases, with completion late this month.

It took me several hours of careful effort to get the same average price on a thousand shares of one stock.  How about trillions of dollars spanning 99.9% of US market cap?

It may go swimmingly.  It’s already underway in fact. We can track with market structure sonar the general shape of Passive patterns. They are large and dominant even now.  That also means they’re causing the volatility we’re experiencing.

The mechanics of the market affect its direction. The good news is the stock market is a remarkably durable construct.  The bad news is that as everyone fixates on the lights and noise of headlines, the market rolls inexorably toward the unseen. We’re shining a light on it (ask us how!).  Get ready.