March 2, 2022

Rise and Fall

The stock market last week posted its best day since 2020 and gave it back.

Why?

And why does your stock rise while another falls, and how do stocks trade today?

I’m glad you asked!

A week ago on Feb 23, the market moved clear of February derivatives-expirations.  Stocks surged. Then index futures expired Feb 28. Stocks swooned (the event isn’t neat but spills over the vessel either side).

The mechanics of those moves are forms of arbitrage. There are two parties to both, and at least one hedges exposure, compounding both market volume and volatility.

Tim, it’s Ukraine, you say.

Has your investment plan changed?

In my adult life, never have TV images of invading forces been other than Americans.

Hm.

All money tracking a benchmark or model depends to some degree on futures contracts. Using futures, passive money transfers responsibility for holding the right components in the right amounts at month-end to banks.

Banks like Goldman Sachs in turn mitigate exposure by buying, selling, shorting, stocks.

That tumult just happened.

Ukraine? The Federal Reserve? War? Inflation? Earnings?

Illustration 67216931 © Thelightwriter | Dreamstime.com

Risk and uncertainty affect markets, yes. But gyrations aren’t the juking and jiving of investors. It’s hedging and arbitrage.

(Editorial note: For more on that topic, here’s a list from The Map).

What you get from your stock exchange daily, public companies, is the same wherever you’re listed. It’s peer, sector, industry, performance; broad measures, market commentary, the dollar, gold, oil. Now maybe crypto. When appropriate, stuff on wars and rumors of wars.

Same that I received as an investor-relations officer in 2001.  Why no change? No reason. No one cares.

Anyway, it’s only possible for your stock to behave the same as your peers if the characteristics are the same. Liquidity, supply, demand, behavior.

CEOs think, “My stock’s down, my peer is up, investors are buying them, not me.”

The math says no. The stock market is like every market. There are supply-chain disruptions. Demand fluctuations.

The average trade-size in S&P 500 components last week was 98 shares – less than the regulatory minimum bid or offer of 100 shares, lowest we’ve marked. So prices are unseen till afterward.

If a market order – a trade without a price – is 100 or fewer shares, the law of the stock market says it must be filled. Now.

So. Either the broker receiving the trade can automatically route it away to somebody else, or they’ve got to buy or sell the stock.

Don’t ponder the risk implications. Your head will explode. Stay with me here.

It gets to why the stock market does things you don’t expect, why your stock doesn’t trade as you suppose.

That trade I just described? It’s filled even if no actual buyer or seller exists (part of the reason you can’t track what sets your price with settlement data. Doesn’t work anymore.).

It’s the law. Market-makers are exempt from locating shares to short.

The machines, the algorithms, are programmed to know this fact. They change the price.

Tim, I don’t get it. What are you saying?

That it’s most times not about you. And you should know what it IS.

Your CEO asks, “How come our stock was down and so-and-so, our closest peer, was up? What investor is buying them and not us?”

Statistically, 90% of the time it’s supply/demand or liquidity differences and not some investor picking your peer.

Last week in the S&P 500, the average stock traded 60,000 times daily, up 50% from long-term averages.  Intraday volatility – spread between high and low – was 3.6%.  Average dollars/trade was $17,000 and index stocks traded $1 billion daily.

The median is about $9,000/trade. To be in the top thousand marketwide, where 95% of the money is, you’ve got to trade $4,200 at a time.

Back up 200 days and it was $5,000.

You got that, IR people? It speaks to what investors can BUY. Or sell. What are your stock’s liquidity characteristics?

The best three S&P 500 stocks the past five days:

ETSY the last five days: 130,000 trades/day, $9,000/trade, dollars/day, $1.2 billion. Computerized speculation led gains, and Demand was bottomed, Supply was extreme and created a short-squeeze.

ENPH:  66,000 trades/day, $8,000/trade, dollars/day was $530 million. Computerized trading led ENPH too. Demand was bottomed, Supply was on trend.

MOS: 90,000 trades/day, $6,000/trade, dollars/day, $530 million. Active Investment was the lead behavior, and Demand rose while Supply fell.

Wouldn’t you want to know this stuff? We have more, including all the trends.

Why isn’t every public company measuring these data? Dunno. Mystery.

But. We’re going to democratize it. All public companies can and should know these data, and we’ll open that door.  Stay tuned.  

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