February 2, 2022

Electric Jellyfish

There are four Pinthouse locations in Austin and Round Rock, TX.

We’ve not been to any of them but we’ve had their scrumptious hazy IPA beer, Electric Jellyfish.  It may be the world’s best.

And the stock market has been an electric jellyfish.

Illustration 234002321 / Electric Jellyfish © Rul Stration | Dreamstime.com

Let me explain, on this Groundhog Day (it’s 2/2/22!).  Jellyfish float on the currents.  They don’t propel themselves with purpose around the sea.  But an electric one probably would, except you’d never know where it was headed.

Substituting, the stock market floats on the currents, and if it was electric, it would propel itself around and you’d never know where it was headed.

Look, I’m joking to some degree!  We all make our living in the stock market.  And as Joe Walsh said, life’s been good to me.  Remember, the name of that album was “But Seriously, Folks….”

And the stock market has measurably predictive characteristics. So do jellyfish from the standpoint that ocean currents will tell you where they’ll go.  Currents drive both.

And it’s hard to fight the current.  Friday Jan 28 and Monday Jan 31 reflected the explosive role of futures contracts in the stock market, which in turn effectuate the epochal role of Passive money in stocks.

One thing leads to another (a good song by The Fixx but maybe the better version of one thing leading to the next is the great country tune by Hardy called “One Beer”).

Passive money follows a model. Fast Traders set the prices. 

Suppose investors are biased toward GROWTH. Those stocks get an outsized allocation in models tracking otherwise statistically predictable benchmarks like the S&P 500.

That in turn drives up the value of associated options contracts.  The notional value of traded put and call options exceeded the value of trading in the underlying stocks in 2021.

And that’s a further input into the value of futures contracts used by index and exchange-traded funds to match benchmarks.  They can transfer the risk of buying or selling stocks to banks through baskets of futures expiring the last monthly trading day.

All of that stuff compounds, driving values artificially high. If that current changes, markets can lose value at stunning speeds.

Jan 28 was the day before options contracts expired. Right before the close, stocks surged – as an electric jellyfish might.  Happened again Jan 31 as Dec-Jan futures contracts true-ups hit, and money reset to contracts lapsing the last day of February.

Last week, trading data we track showed investment declined about 12% in the S&P 500, while trading tied to derivatives that we call Risk Mgmt rose over 3%, Fast Trading 2%.

That’s the effect of futures contracts used by Passives – transferred to banks – and machines sifting the prices of stocks and derivatives and rapidly repricing both.

There’s another electric jellyfish datapoint here.  Short Volume, daily trading on borrowed or created stock, hit 49% of total market volume Monday Jan 31, the highest level we believe we’ve ever recorded in the S&P 500.

In a sense, the stock market went beyond electric jellyfish into the metaverse.  Banks tasked with truing up indexes had to buy gobs of stuff to make index clients whole after a tumultuous January.

That’s the implication.

And because there was very little stock for sale, Short Volume – the supply chain of the stock market – surged to accommodate it.

Market-makers can manufacture stock. They are required to make bids and offers even when no one is buying and selling. They’re exempt from rules requiring others to first locate shares.

We might say that banks prestidigitated stock to fill orders for derivatives.  Just made up shares to back instruments that might not get used.

I’m sure it’ll all work out.  Cough, cough.

And look, it might.  Weird things can occur, without apparent consequences.  But it all compounds.

At some point, all the screwy stuff we humans are doing to escape reality is going to bring us crashing back to earth. So to speak.  Monetary policy is artificial. The stock market is artificial. And now people are spending hundreds of millions of dollars on dirt that doesn’t exist, in the metaverse.

It was a terrific January 2022 for ModernIR as companies of all sizes sought us out for a grounding in the reality of data, a way to track the electric jellyfish.

And we can track it.  We can’t predict when it’ll stop working. We can predict that if you like IPAs, you’ll love Electric Jellyfish.

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