September 28, 2022

Market Palio

Maybe we should have a horse race to decide our elections. 

In Siena, the whole region gathers July 2 and August 16 annually, thronging the Piazza del Campo (the city square you see behind our beverages in the photo here, shot Sep 26) for The Palio, pounding equine competitions involving the city’s contrade, the 17 districts of Siena.

View of the Piazza del Campo from the best bar seat in the square (photo Tim Quast Sep 26, 2022).

After Siena succumbed in a 150-year war with Florence (talk about endurance), competition turned inward. The city’s uniquely designated districts redirected their energies to competitive horsemanship instead of Florentine raids.

Each year, horsemen from ten of the contrade race each other, three furious laps around the square. The other seven automatically qualify for the next race, with three others added by lottery.

I’ll skip the finer details but it’s full of intrigue, chicanery, sordid deals, massive sums spent on jockeys, who may conspire and cheat, and tears and cheers and meals and wine.

In short, it’s just like politics. 

But in The Palio, while victory is everything, it really means nothing. It’s just Sienese culture.  That seems like a much better outcome than modern politics.

The stock market lately too has felt like The Palio.  A drumming, entertaining, heartbreaking, chaotic mess pelting around turns and slamming into walls, with little logic or purpose.

Can we make sense of it?  Of course. But not logically.  It’s the Palio of Siena.  It only makes sense if you understand the underlying story and purpose.

Public companies and investors, your best friend amid the churning dirt of the market’s Palio is market structure. It’ll help you make sense of what seems to be random disorder.

The best-performing S&P 500 stock year-to-date is OXY, up about 88%.  Ranked second is ENPH, up about 55%.  Both are energy stocks, one the old-fashioned kind with a D rating for planet-friendliness, whatever that means.  The other is a clean-energy stock.

Active money is 9% of OXY’s daily volume, 10% of ENPH’s. Both perform well financially but not more so than other Energy stocks. But both are darlings of Passive money, receiving outsized allocations. Over 40% of trading volume in both traces to Exchange Traded Funds.

It’s like the two stocks were the winning horses in The Palio (where the horse wins, even without a rider).

It’s a lesson about the stock market. There’s still a lot of clinging to the notion that you own “good companies.”  As defined by what?  OXY and ENPH are good companies as defined by the amount of volume from ETFs.

If that’s the money driving the stock market, then they’re both good companies.

And it illustrates the importance of understanding what kind of money creates good companies.  And it may not be revenue and profits.  It may be Demand vs Supply.

OXY has spent 130 of 183 days since Jan 4 at 5.0 or higher Demand on the ten-point scale we use to measure buying and selling by investors and traders, called Market Structure Sentiment.  ENPH has spent 118 days at or over 5.0. 

The more time stocks spend over 5.0, the better they do. There’s no direct connection to financial results.  It’s about whether there’s greater Demand for the stock from any purpose or time-horizon.

Did anyone pick OXY and ENPH as the 1-2 ranked S&P 500 stocks for 2022 when the year began?  I don’t know.  Not based on financial performance. Those winners would have come from the Tech sector. Which has been brutalized.

The math is clear.  Winners in the stock market are not determined by financial performance but by Supply/Demand balances. Strong demand, constrained Supply, prices rise.  It’s a much better predictor of winners than is the bottom line.

For better or worse.

In that sense, the stock market is The Palio. It’ a horse race built around culture, where “culture” is market structure.

We tell users of Market Structure EDGE to always know the Supply/Demand balance of stocks they like, and to buy divergences.

And for public companies, the Supply/Demand balance is critical to predicting what stocks will do at any time, but especially into earnings.  After all, Supply and Demand are measuring every input – fundamental, quantitative, long/short, global macro, hedged, high-frequency, leveraged, you name it.

So how do you win the stock market’s Palio?  It’s a lottery.  You can improve your chances of a shot at victory by first being BIG.  Get into the Russell 1000 and do it with M&A if you must. You’ll be where 95% of the money and the market cap is.

And then it depends on your contrada, your segment of the stock market.  Then you hang on till the three laps are done. The good news is we can measure your odds of winning.

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