The stock market is a story of the seen and the unseen.
Ethereal, hieratic, a walk by faith not by sight kind of thing? No, not that.
And by the way, I’ve not forgotten about the rest of the story, as Paul Harvey (millennials, look him up) would say, the good developments for investors and public companies I mentioned some time back. I’ll come to it soon. This week there’s urgency.
A tug of war rages between bulls and bears. Some say stocks are wildly overpriced. There’s record bearishness on stocks in surveys of individual investors. Yet people are daytrading like it’s 1999. And record stockpiles of cash like tumbleweeds on Kansas fences strain at the bounds, and the bulls say, “Just you wait and see when that money rolls into markets!”
All of this is seen stuff. Things we can observe. As are promising clinical developments in steroids that might help severe coronavirus sufferers. Rebounding retail sales. The Federal Reserve taking tickets at the market’s door.
None of those observable data points buy or sell stocks, though. People and machines do. In my Interactive Brokers account as I continue testing our new Market Structure EDGE decision-support platform for traders, I sold a thousand shares of AMRN yesterday.
It took me several hours, nine trades, all market orders, not limits. I’m cautious about limit orders because they’re in the pipeline for everyone intermediating flow to see. Even so, only three matched at the best offer. The rest were mid-pointed in dark pools, and one on a midpoint algorithm priced worse, proof machines know the flow.
In a sense, 70% of the prices were unseen. Marketable trades have at least the advantage of surprise. Heck, I’m convinced Fast Traders troll the quotes people look up.
Now, why should you care, public companies and investors?
Because the unseen is bigger than the seen. This cat-and-mouse game is suffusing hundreds of billions of dollars of volume daily. It’s a battle over who knows what, and what is seen is always at a disadvantage to those with speed and data in the unseen.
There are fast and slow prices, and the investing public is always slow. There are quotes in 100-share increments, yet well more than 50% of trades are odd lots less than that.
There are changes coming, thankfully. More on that in a couple weeks. What’s coming this week is our bigger concern, and it’s a case of seen versus unseen.
Today VIX options expire (See ModernIR planning calendar). There are three ways to win or lose: You can buy stocks in hopes they rise, short them on belief they’ll fall – or trade the spread. Volatility. It’s a Pandemic obsession. Inexperienced traders have discovered grand profits in chasing the implied volatility reflected in options. I hope it doesn’t end badly.
Volatility bets will recalibrate today. The timer goes off, and the clock resets and the game begins again.
Thursday brings the expiration of a set of index options, substitutes for stocks in the benchmark. Many option the index rather than buy its components.
Friday is quad-witching when broad stock and index options and futures expire (and derivatives tied to currencies, interest rates, Treasurys, which have been volatile).
The first quad-witch of 2020 Mar 20 marked the bottom (so far) of the Pandemic Correction. And wiped out some veteran derivatives traders. We’re coming into this one like a fighter jet attempting a carrier landing, with the longest positive stretch we’ve ever recorded for Market Structure Sentiment™, our 10-point gauge of short-term tops and bottoms.
It’s at 8.2. Stocks most times trade between 4.0-6.0. It’s screaming on the ceiling, showering metal sparks like skyrockets.
And beneath lurks a leviathan, not unseen but uncertain, a shadowy and shifting monster of indefinite dimension.
IR Magazine’s Tim Human wrote on ramifications for public companies, an excellent treatise despite my appearance in it.
Big indexers S&P Dow Jones, Nasdaq and MSCI haven’t reconstituted benchmarks this year. The last one done was in December. Staggering volatility was ripping markets in March when they were slated and so they were delayed, a historical first, till June.
Volatility is back as we approach resets affecting nearly $20 trillion tracking dollars.
And guess what? The big FTSE Russell annual reconstitution impacting another $9 trillion is underway now in phases, with completion late this month.
It took me several hours of careful effort to get the same average price on a thousand shares of one stock. How about trillions of dollars spanning 99.9% of US market cap?
It may go swimmingly. It’s already underway in fact. We can track with market structure sonar the general shape of Passive patterns. They are large and dominant even now. That also means they’re causing the volatility we’re experiencing.
The mechanics of the market affect its direction. The good news is the stock market is a remarkably durable construct. The bad news is that as everyone fixates on the lights and noise of headlines, the market rolls inexorably toward the unseen. We’re shining a light on it (ask us how!). Get ready.