November 26, 2019

Blurry

As Thanksgiving nears, we’re giving thanks for a rock-star stock market since last December, when it fell 20%. Can it hold?

In the simplest sense, whatever has been driving it must continue. Thanksgiving is to me the best holiday because it’s introspective. So let’s reflect on what’s behind stocks.

Everyone says corporate earnings, the economy, monetary policy.  The US economy is strong.  Earnings though are weaker the past three quarters than comparable earlier periods, so it’s not that. Monetary policy is easy, which helps by fueling leverage.

Buybacks?  Sure, a contributor. Geopolitics, trade deals, tariffs?  You’d think those might be headwinds. So far, no. Remember, news doesn’t buy or sell stocks. People and machines do.

Fund-flows? Research from Ed Yardeni says bonds have benefited while stocks have suffered. Domestic trends are disturbing – steep declines for years (See Figure 5) as money steadily shifts toward bonds and foreign equities.

Along our path of reflection we come to market structure – and why both companies and investors should learn it. Between Jul 1, 2015 and present there are 1,097 trading days. Of those, 589 are between 4.5-6.0 on ModernIR’s 10-point Market Structure Sentiment buy/sell scale.

Do the math. The ratio (589/1097) is 5.4/10.0. Reads over 5.0 mean machines will lift prices.  It’s a GARP market – growth at a reasonable price.

Now let’s add in the time the market has spent in “Overbought” territory, above 6.0. It’s 301 days, or 27% of the time. It’s been Oversold (below 4.5) 207 days, 19%.

There’s our answer. It’s GARP 54% of the time, momentum 27% of the time, value 19% of the time. It’s more growth than value, more buying than selling.  Whether money comes or goes, if what comes is disposed to pay up, stocks rise.

Contrast with Sep-Dec 2018. During that period when stocks fell about 20%, they were Oversold 44% of the time and Overbought just 16% of the time.

Narrow the data to 2019 and stocks are GARP just 44% of the time, Overbought 39% of the time. It’s become momentum almost as much as growth.

Zoom on Aug 1-present. GARP behavior is down to 41% of trading, Overbought, 36% of the time, Oversold 23% of the time.

Shouldn’t we be measuring that? By sector, industry, stock? Well. We do, at ModernIR.

Shifting our lens, in the past three weeks across the eleven market sectors, selling has outpaced buying 61% to 39%.

How does money leave stocks while the market sustains GARP or momentum (more Overbought than Oversold) characteristics?

The money behind prices is increasingly short-term, and leveraged. Add up everything that’s not long-only investing and it’s 86% of trading. The AMOUNT of money chasing stocks can shrink and stocks will still rise because the TIME dedicated to buying or selling is increasingly up-or-down, not buy-and hold.

Lesson? Public companies and investors, you cannot count on fundamentals, macroeconomics, central banks, to predict what the market will do. It moves in response to its temporal behavioral biases.

Or put another way, direction hinges on the short-term propensity of money to plow back into stocks tomorrow or to stop doing that.  It shifts to GARP, to growth, to value, and back. When the bias in the data blurs, money falters.

Data are getting blurry (as rock band Puddle of Mudd would say). It’s not a GARP market anymore.

For that reason, I’ll go out on a limb and say it’s too early to call this a record year (like Eric Church, for you country fans).  What got us here has begun eroding. We’re only 1% above the GARP levels for stocks in Q4 2018.

Wrapping up, it’s a great season, this one of Thanksgiving.  Give thanks!  And be alert to changing behaviors.  When lines blur – in your stock, your peers, your sector, industry – you should know. It’s a weather report on what’s coming. We want to stay clear-eyed.

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