July 25, 2012

Eternal Motion

“What happened to our stock?”

It remains the question that haunts the dreams of IR professionals. Well, that and whether it’s better to use “via” or “through” in the call script.

Looking back through July Sentiment Indicators for clients, which reflect how passive and active investment, speculative trading, and technical signals affect price, it’s a startling picture. Only two – total! – for the entire month thus far were at any point “green across the board,” meaning each behavior tipped green, rather than yellow or red, signaling the best forward view.

Think about that. If our client base is a reasonable proxy for the market, why is 95% of it something less than “all good”? Surely more than a smattering sport solid fundamentals. In a random group of 100 public companies, are but one, two or five able to earn the best marks?

Say it’s true. Among the companies comprising the national market system (now only about 3,600), say a handful meet criteria every investor, every risk manager, wants. Apply that thinking to a market where index and ETF products number into the thousands – more than the stocks available from which to construct these exchange-traded-funds and the indexes they mimic.

Let’s zoom in our microscope. The Dow Jones US Consumer Services Index aims to track performance of the consumer services sector using 196 components with a mean market capitalization of $9.4 billion. All manner of ETFs are pegged to it, ranging from the ProShares Ultrashort Consumer Services ETF, to IYC, the iShares Dow Jones Consumer Services ETF.

Suppose your stock is in consumer services. You’re not one of the proverbial Apples, that handful weighting every index seeking “diversified” exposure. We could call those the “green across the board” group, though whether Sentiment is green, yellow or red is a very individual thing.

How will your stock trade? When all’s well for the Big Greens, you’re humming. But if they stumble, now suddenly you’re yanked about by every random arbitrage scheme seeking separation between this consumer-services stock and that index futures contract. And often, your CFO thinks it’s your investors.

You can hope that the active investors listening to your story are willing to compete forcefully enough to set your price amidst high-frequency traders, the Federal Reserve tromping through markets with changes to the value of the dollar, and all the swooshing and sweeping of programs across equity markets to balance this ETF or re-weight that portfolio and by all means to beat the underlying measure.

It may not happen. I admit it. It seems discouraging. The good news is that we actually sort all that stuff out. We’ll know which behavior causes your price to change.

But it’s context and ammunition for when your CEO or CFO asks: “What happened to our stock?” Relate this story. It helps sometimes to see that, rather than the planet, your stock may be the ship on the ocean.

We’ve got good compasses and well-crafted sextants. But on any given day, it’s rough seas now.

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