Options expire and renew starting today and running through Tuesday, the last chance for big hedges and bets on the US presidential election.
We could root through Nostradamus’s quatrains for insight on what’ll happen. We could try something more certain, such as wildly guessing. Or we could consider what the data say.
On that point, get this: Last week there was a parabolic pattern in the movement of midpoint prices for the entire Technology sector.
What are the odds that 379 stocks – give or take – with market capitalization ranging from $3.6 trillion (AAPL) to $3.9 million (IFBD) would show a precise four-day mathematical ascent if you added them up and averaged the movement of prices relative to midpoint?
Considerably less probable than predicting an election outcome. But it could be a new high-water mark for the influence of Passive money. A Passive pattern underpinned it and marched down at the same pace that prices marched up. See the image
What would cause that correlation? A largescale Passive basket in the sector. It ended yesterday, the Ides of October. And the market tanked. The thing driving it stopped. Sector demand tumbled 11%.
Should we be uneasy? Let me give you something to think about. All day long on CNBC are the shows – as I’ve shared before – that my beloved superior half Karen calls the “what you do think of THIS stock?” shows.
They’re about valuation. NVDA is trading at 20 times next year’s revenues. Or whatever. But Passive money doesn’t have valuation metrics. Yes, it’s got SELECTION criteria. But it doesn’t value stocks on cash flows or sums of the parts. It doesn’t even really value them with comparables, though it’s buying the herd.
The pattern above is inferential confirmation. That’s a fourth-quarter strategy that we saw only because we happen to measure how prices change relative to midpoint (and we do that for one big reason: national market system stocks by rule trade between the bid to buy and offer to sell).
Well, what if investors mistakenly assign some kind of earnings or revenue multiple to tech stocks on the fact that prices shot up?
I say “shot up” with a dollop of satire because not all prices shot up. Interestingly, Big Tech – the magnificent ones plus some smaller satellites – didn’t put a single entity in the tens last week. NVDA and AMD were nines yesterday as semiconductor stocks tumbled on ASML weakness. GOOG, AAPL, NFLX, TSLA, were all fives and bottomed.
Let me explain. We meter demand for stocks from all market behaviors on a ten-point scale that measures how trades execute, in effect. We call the algorithm “Market Structure Sentiment,” or simply “Demand.” Stuff from 8 to 10 has momentum, while stocks at 5.0 reflect Value (stocks bouncing from one to ten or five to ten are growthy kinds of things).
Passives consider stocks growth or value. How do I know? Because the largest equity asset category is Passive Large Cap Blend (more than half of all equity assets). Value and Growth.
And there aren’t enough of them. Add up the 120 stocks with a hundred billion or more of market cap, with AAPL at the top of the list and INTC clinging to a rung at $100.2 billion but probably out of the group now, and they’re 80% of market cap.
The S&P 500 is nearly 90% of market cap. Five hundred stocks are effectively the entire market. Because the SPX is a quantitative way to access quality. S&P Global has already done the thinking for investors. Members must show earnings in the most recent quarter and the sum of the trailing four must be positive.
And the stocks are liquid and large, about $10 billion of market cap or bigger. It’s the herd that Big Passive money wants.
Yeah but Tim. You said the prices of the entire Tech sector behaved the same way.
The AVERAGE manifested systematically, and it’s controlled by the biggest stocks.
What’s the lesson for public companies and their investors? The stock market is NOT a diverse marketplace for disparate companies pursuing unique capitalist visions. It’s a herd. It sells a product to Blackrock et al called “Large Cap Blend” assets.
Small caps have lost half their assets to large caps in the past fifteen years – since Regulation National Market System was implemented.
What do you get from a system? A product. Not a story.
And investors, it means you buy beta. Because the market IS beta – the herd (not volatility).
What’s coming? Nostradamus notwithstanding, the math to me says there’s a major correction shaping up. We see the risk in faltering Demand patterns starting in July – even as the market has traded to new highs.
Passive money buys the inflated prices set by machines. And then it stops. And what always follows inflation – unless the central bank devalues the currency to prevent the very useful and necessary process – is deflation.
So, we’re off to Spain. Catch you in November! Okay, that’s not the reason! We’ll report back Nov 4, right after the election.
