June 24, 2020

Power of Two

We’re coming to the end of two Coronavirus quarters. What happens now?

In a word, July.  As to what July brings, it’s summer in the northern hemisphere, winter down under.

It’s also the end of a remarkable period in stocks. I don’t mean rising or falling, volatility, the invincible-Alexander-the-Great-Macedonian-phalanx of the stock market (your history tidbit…you can look it up).

By “end” we don’t mean demise.  Though a demise is probably coming. More on that later. We mean the end of epic patterns.

We wrote last week about index-rebalances delayed since December.  In patterns observable through ModernIR behavioral analytics, the effort to complete them stretched unremitting from May 28 to June 18.

Yes, June 19 was a muscular volume day with quad-witching and we saw BIG Exchange Traded Fund (ETF) price-setting that day in many stocks. (Note: ETFs are substitutes for stocks that are easily traded but entitle owners to no underlying assets save the ETF shares.)

But the patterns strapping May to June like a Livestrong bracelet (wait, are those out?) ended almost everywhere June 18.  The effort reflected work by about $30 trillion, adding up money marked to MSCI, FTSE Russell and S&P Dow Jones, to match underlying construction.

Funds moved before rebalances. And the biggest components, ETF data indicate – really, they dwarf everything else – are AAPL and MSFT. Patterns show money piled like a rugby scrum into AAPL call options in early June, and then plowed headlong into AAPL equity between June 12-18.

It’s good business if you can get it, knowing the stock will inevitably rise because of its mass exposure to indexes and how its price then when last money square-danced into an Allemande Left with indexers in December 2019 was about $280.

How many of you remember when AAPL was down to about 5% of the computing market, most of that in academia, and it looked like MSFT would steamroll it right out of business?  And then MSFT was yesterday’s news, washed up, a boomer in a Slack world.

Today both say, Ha! Suckers!

MSFT patterns are like AAPL’s but less leveraged, explaining the divergence in performance over the past year. AAPL is up 84%, MSFT about half that.  You can see here how both have performed versus the Tech-heavy QQQ (Nasdaq 100 from Invesco) and the SPY, State Street’s proxy for the S&P 500.

AAPL and MSFT have pulled the market along like Charles Atlas (and his doppelganger) towing a Pennsylvania railcar (more arcane and anachronistic history for you).

That ended, at least for now.  The Russell reconstitution continues through Friday but in patterns at this point it appears money has already changed mounts, shifted chairs.

The marvel is the magnitude of the effects of these events, and the power of two – AAPL and MSFT.

You’re thinking, “What about the rest of the FAANGs?”

MSFT isn’t one but we include it, and oftentimes now TSLA and AMD.  FB, AMZN, NFLX, GOOG – incisors dripping less saliva than AAPL – are massive, yes. But they don’t pack the ETF power of the two.

Let me give you some data. There are 500 Financials stocks, about 400 Healthcare, around 300 Consumer Discretionary.  Tech is around 200.  Most of these sectors are Oversold, and there’s a lot of shorting. The FAANGs are Overbought and more than 50% short, collectively.

The few outweigh the many.

And meanwhile, Market Structure Sentiment™ is both bottomed and lacking the maw it signaled. Either we skip across the chasm for now, or it trips us soon (stocks love to render fools of soothsayers).

The salient point is that the market can’t be trusted to reflect views on Covid19, or trade with China, or the election in November, or economic data, or actions of the Federal Reserve (curiously the Fed’s balance sheet is tightening at the moment). It’s right now defined by the power of two.

Two legs.

We humans stand fine on two. Can the market?  We’re about to find out.  And the degree to which your shares are at risk, public companies, to those two legs, and your portfolio, investors, is measurable and quantifiable. Ask us, and we’ll show you.

Share this article:
Facebook
Twitter
LinkedIn

More posts

dreamstime m 206876446
February 14, 2024

I’ve got my Valentine, for which I’m grateful every day.  Whether the market finds love after yesterday’s blood remains to be seen. Back when the...

dreamstime m 212403964
February 7, 2024

On Nov 15, 2021, NVDA closed at $345.30 on a hundred million shares of volume. Without context, that information is interesting but unhelpful.  I’d note...

dreamstime l 24803177
January 31, 2024

Consumers are confident. I’m not sure they have all the data. It’s a lesson for public companies. In case you missed it, The Conference Board’s...

dreamstime l 56087804
January 24, 2024

If I said the name “Sherlock Holmes” to you, what’s your snap response? Probably, “Elementary, my dear Watson.” I have long favored a line by...

dreamstime l 50373701
January 17, 2024

What do bitcoin Exchange Traded Funds mean for public companies?   More competition for those dollars you chase with your story. A number of you...

dreamstime m 4397737
January 10, 2024

Total nonfarm payroll employment increased by 216,000 in December. So said the headline from the Bureau of Labor Statistics in its monthly report on jobs...