Remember the Ford Pinto?
(EDITORIAL NOTE: also remember to join tomorrow’s weekly live Demo and discussion for Market Structure EDGE, if spots are still available).
If you were born in the 1980s or later, you probably don’t know the Pinto. But thanks to internet search engines, you can look it up. There’s a scene from the cheesy Val Kilmer comedy Top Secret! where a German military vehicle taps a Pinto bumper and blows up.
In a sense, FRC (the bank, First Republic Corp) tapped the bumper of the stock market and it rang like crystal and then detonated. I’m joking, mostly.
I’ll come to that.
A bit more history: In 1998, I was working for a startup (where I rose from sales guy to President) and we shifted from typing stuff into a new outfit called Ask Jeeves to search for answers and started using a whizbang thing called “Google.”
We said amongst ourselves, “This could catch on.”
But did we really think in 2023 that Bill Gates’s outfit, which was a big deal in 1998, would be the one to ford Google’s moat and threaten the fortress?
We looked at MSFT and GOOG market structure Monday on Benzinga Premarket Prep (I do it most Mondays, 830a ET) and I noted the superiority of MSFT’s Suppyly/Demand balance. Steady – solid, we could call it – Demand, 30-day downtrend in Supply that sits at 40% (that’s Short Volume, the supply chain of the stock market), way below market levels.
One would have thought a startup would be the assailant breaching the great Google barrier, but no. It’s the old institution. Yet my trading decision-support firm, Market Structure EDGE, is a reason why. EDGE is built on Azure Blazor from Microsoft. EDGE and ModernIR both run in Azure Cloud.
We’ve gone back to the future.
I don’t know what’ll happen with Artificial Intelligence. But I pointed out here that machines, not humans, were pricing AI (the stock, not the concept). That’s measurable, like Supply and Demand.
I’m heading somewhere, and I’ve not forgotten about FRC.
In the past week, I related three things to EDGE users in daily Market Desk notes. One, risk to stocks would be greatest with new options trading, not with old ones lapsing last week. That’s because what motivated the use of the old ones was already in the past. So, the stock market’s fall yesterday on Counterpart Tuesday reflects new but unrealized risk.
That’s important information. It will recalibrate again at May options-resets.
Second, the market has in the past five years always declined when Demand on our ten-point algorithm metering buying and selling by investors and traders exceeds 6.5 in the S&P 500. That happened Apr 6. SPY was $409 (4,090 SPX).
Yes, it held up well. And we’re coming to a Ford Pinto, a tap on the bumper, and FRC.
But here we are at $406. You might say, “Okay, but that’s not REALLY down. That’s statistically immaterial.”
Maybe so. We’ll see how it goes. Broad Sentiment is 5.7, still above the crucial 5.0 fulcrum. But barring a sudden refreshing market breeze, it will fall from here.
And third, I said the market was fragile. Finely balanced. That FRC could destabilize it with earnings.
Well, that happened.
Volatility has vanished, a product of machines “crossing the spread” to match bids and offers, causing prices to tighten. But small spreads are susceptible to sudden trouble. Models adjust – artificial intelligence – to smaller spreads stop crossing it if prices suddenly move (this is the hubris of AI, the discipline, too. It won’t adapt well to sudden change, like humans can).
And all it takes is a tap on the bumper.
FRC shouldn’t destabilize stocks. It’s not Lehman Brothers or Bear Stearns. I’m not calling FRC a Ford Pinto. Quite. But it should be…unsettling…that a small institution can fracture market stability. Stocks are too dependent on borrowing. Supply. Short Volume.
The same is true in the country, across the planet. Think about it.