Tagged: Stocks

Right and Wrong


They got it right, and they got it wrong.  I’ll explain in a moment.

Karen and I took two weeks off from the Market Structure Map and disappeared into the white wilderness.  Steamboat Springs, CO logged the biggest pre-January snow season in nearly 40 years.  Over 200 inches.

I snapped this photo at 10,500 feet atop Sunshine Peak before pointing my skis downhill.

Sunshine Peak, Steamboat Springs ski resort. Courtesy Tim Quast

But there were days when the snow fell in such volume that we resorted to the fireplace and binge-watching Yellowstone.  We’re behind the rest of you but catching up.

I grew up on a cattle ranch. Not one like that with a chopper.

But the battle for survival was similar. We weren’t shooting people and bending interpretations of right and wrong. But I was on hand in the so-called Sagebrush Rebellion when guns bristled everywhere.

My dad would say what Kevin Costner’s character did. Ranching is a hard way to make a living because everything is arrayed against you. The government, the activists, the diseases, the weather. You can do right all day long and still get it wrong.

WSJ columnist James Mackintosh also wrote about right and wrong. Not like Yellowstone, no. He said (subscription required) Wall Street nailed earnings but missed the bear market.

Sellside estimates were within $1 of actual earnings. But the market didn’t do what those numbers should have delivered. Right, and wrong.

If earnings won’t tell you what stocks will do, what’s the point?

That question is the existential one for the investor-relations profession.  In the TV show Yellowstone, the existential question for the Duttons is how to beat impossible odds.

So, IR people, is the market for us or against us?

What John Dutton learns is you have to have influence.  There’s more and I don’t want to give it away.

But it’s the ONE THING the IR profession has never realized. We go right on doing the same things leading to the same inevitable outcome, which is that story doesn’t set price.

Why not? Because the stock market’s purpose isn’t to help your story manifest in your share-price. 

As in any market, the purpose is found in the principal activity. It’s still true that cattle ranching reflects its principal activity: raising bovines to supply a grocery market (you don’t have to like it but it’s true).

A Christmas tree farm raises Christmas trees.

The stock market sets prices.

We’ll come to it in a future Market Structure Map, but those 1,600 pages of proposed new SEC rules you’ve heard about?  They contain nothing that helps you, issuers, see your story better reflected in your shares.

No, they have everything to do with setting prices.  And who sets prices? 

Stock exchanges. Fast Traders. That’s who the market serves. 

How and why?  They learned the Yellowstone lesson. They have people everywhere. They lobby for influence.  They shape rules to help themselves.

We never have.  As a profession, we can do everything right and get it wrong.

I’ll let you ponder that.

Now, a word on the market in 2023 since this is the first Market Structure Map of the new year. Turns out 2022 was a top-ten worst for returns since 1926, with the S&P 500 down 19%.

There are only four periods since 1926 when stocks have posted back-to-back declines:  1929-32, 1939-41, 1973-74, and 2000-02. The losses for those periods were about 86%, 21%, 40%, and 46%. All those periods were recessionary.

S&P 500 losses of about 37% during the so-called Great Financial Crisis came all in a year, 2008.

It won’t surprise me if we notch the first back-to-back losing years since 2001-02 on a total-return basis. 

Why? Because stocks had a top-ten bad year on no reason save prices.  What if we get a reason this year?  All those other periods, again, were recessionary.

And here’s the trouble for investors. It’s not just that it takes five, ten, years to get back to level.  You never get back to level.  Stocks go down 40%, but prices of everything you buy go up.

Each time we retrench, governments intervene and expand the supply of money. So you lose 25% or 50% of your savings, but prices never fall 25-50%.  They rise even faster. 

I penned this letter to the WSJ on how the Federal Reserve contributes to this trouble.

The only money avoiding these growing chasms is the short-term money.  The parties setting prices don’t lose.

The stock exchanges don’t write research or provide market-making support.  Fast Traders don’t support customers, research, issuers. They trade their own capital.

It’s a new year. We have a fresh new chance to do something. 

We must first understand how the stock market works. We can’t argue for change without first knowing what’s wrong (we do, and you should have us on your side).

Number two, as a profession, we need to get some political leverage. NIRI, that’s your puzzle to solve in 2023. It’s not just the right thing to do.  It may be our Yellowstone moment.

Barometric Pressure

About 35 seconds after Consumer Price Index data debuted yesterday at 830a ET, Dow Jones futures were up 950 points.

What is the stock market a barometer for?  Inflation was 7.1% instead of 7.3%. The all-time high for blue-chip stocks was 36,952 on Jan 5, 2022.  The Dow was near 35,000 before stocks opened yesterday, 5% away.

Illustration 25481583 / Barometer © Paul Fleet | Dreamstime.com

By the time trading began an hour later, it was still up over 700 points but Dow stocks briefly turned 60 points negative before closing up 100 – a thousand-point swing.

Who knows what happens today with Jay Powell speaking, or tomorrow with index futures expiring and Friday when indexes rebalance and options expire, and next week when VIX derivatives reset right before Christmas.

The WSJ reported yesterday too that the federal deficit set a November record of $250 billion, the net of tax receipts minus an all-time monthly government spending record of $500 billion.

And credit-card debt is at an all-time high, along with consumer credit of all types, the Federal Reserve reported last week. The savings rate is the second-lowest on record at 2.3% of income after spiking near 35% early in the Pandemic.

It’s not the end of the world, but rising debt and rising prices are the enemies of prosperity, not its authors. 

The stock market isn’t a good barometer for what’s happening.

And boom and bust cycles aren’t found in nature. They’re byproducts of managing economic outcomes. They never happened in tribal economies. Eating and drinking and marrying and giving in marriage are perpetual events swept away only by floods of exogenous origin.

Such as floods of money.

And the stock market further obscures reality because so much of its behavior chases what happens in the next seconds.  Machines behind a majority of volume aren’t concerned about earnings in the S&P 500 in Q1 2023.

The stock market is thus a barometer for temporal prices untethered from output. 

It also fuels the capacity of large institutions to transfer risk. Futures surge or plunge on inflation readings because risk-transfer can occur electronically through derivatives.

Trading once the market opens becomes a race by the parties selling insurance to mitigate its effects.  We see it in the very steep levels of Short Volume – which is Supply, like currency. It’s almost 49%. The entire stock market is a global-macro fund.

Falling inflation, falling oil, are a consequence of the reversal of the dollar’s Pandemic weakness. It would happen if the Fed hiked rates or didn’t. Excess dollars would be absorbed in things, and prices would stall, and fall.

Between May 2021 and Sep 2022, the dollar rose more than 20%. The Fed didn’t start hiking till Mar 2022, a proof.

A strong dollar lowers prices, especially for commodities like oil.  Oil dropped from over $120 in June 2022 to $70 this month.

But since roughly Oct 1, the dollar has lost 10% of its value.  Oil is starting to rise.  And the decline in consumer prices could falter.  It’s conceivable that we could see job-losses and economic contraction at the same time that oil and other prices rise.

Maybe even stocks. I’m not predicting it.  I’m saying the fixation on the medium of exchange makes it possible, and the market reflects that barometric pressure.

There is a risk, however.  Over 60% of trades are odd lots, driving average trade-size near 100 shares in the S&P 500, about the same as the regulatory minimum quote. A material part of all trades on a given day occur in tenths of pennies.

Tiny trades diffuse economic and monetary volatility, creating wide disparity. The stock market can for a long time be a barometer for money and not the economy.

But it means the alignment, at whatever point it comes, can be brutal. The air must go out of one or the other, economy or market, to reset values.

Suppose the Fed shifted from promoting credit to advancing savings?  Rate-hikes are transitory, unlike inflation. It’ll cut rates the moment the economy falters.

But say you got 10% in a savings account. The economy would contract, prices would fall, jobs would be lost, borrowers would default, and the government might have to restructure. But money would buy way more. People would need less credit, less welfare.

That won’t happen.

So, we’ll continue driving a wedge between stocks and reality. The cost may be a violent event for stocks. I’m not predicting it. I’m saying the odds of it have now risen.


When you’re amid the tulips you don’t know it. 

Much has been written about the Great 17th Century Dutch Tulip Bulb Mania.  I’m not going to dredge the channel anew.

Photo 6042009 / Tulips © Pindiyath100 | Dreamstime.com

But taking a skiff back to skim over the surface is worth doing, to remind us humans that what we think we know at a given time is incomplete at best and perhaps way off.

In the 1630s, tulip bulbs became the biggest financial market in history in Holland.  People thought the sky was the limit for the value of tulip bulbs.

Like the Winklevoss twins saying bitcoin was headed to $400,000. Scott Minerd of Guggenheim Partners, a man of gravitas and reputation, concurred.  FTX was worth $32 billion.

We didn’t know we were amid tulips again. 

I’m sure that people in The Netherlands thought that if somebody was willing to pay as much for tulips bulbs as they paid for a house that somebody else would pay the value of two houses.

The trouble always is that forecasting higher prices for things supposes someone can and will pay a higher price. 

And what causes higher prices?

The same thing always.  Money. Seventeenth-century Holland was awash in gold from the new world. Inflation.

What about supply-chain issues, wars, basic enthusiasm? None of these can gain – pardon me – purchase unless there’s money available to spend.

Oil is back below where it was when Russia invaded Ukraine so all the talk about that war causing energy inflation is bogus. It was just tulips. Look, Ukraine’s economy is the same size as Denver’s. To suppose the use of fuel in Denver will price the global commodity market is just. Dumb.

Here’s a timeline using oil to illustrate the arc of tulips.  On Mar 15, 2020, the US dollar as measured by the “dixie,” the DXY index, shot up to nearly 103. Call 108 parity with the euro. In Feb 2018 the DXY was near 89.

By Jan 2021, the dollar was back to 90 as floods of greenbacks sapped its value.  Had not the whole rest of the planet also been hosing their economies in currencies, it might have been 70.

Meme stocks soared, oil soared, prices everywhere soared.

Then that stopped.

Between June 2021 and Sep 2022, the DXY rose from about 91 to 114. 

That’s why oil fell and inflation has eased some.  And why the stock market hit post-Pandemic lows. Everything becomes a tulip when it rains currency.  Everything returns to earth when the rain stops.

But it’s not synchronized. One thing happens, the other follows.

The DXY dipped near 104 last week.  Oil prices move inversely with dollars, as do stocks. So oil is headed back up. It’s messy but you can always find the currency inverse correlatives.

We just know exactly when or where. If the Federal Reserve sells assets off its balance sheet, trading them for dollars and removing dollars from circulation, the DXY will rise again.

And tulip prices will fall anew.

It behooves us to understand the characteristics of fields of tulips and the probability of wandering into and out of them.

Which leads us back to the stock market.  I’m in Wilmington DE for a Board meeting where the Investor Relations Officer and the CFO have called together experts like ModernIR to help the Board understand how the market works.

It’s laudable. Every public company should do that – not so ModernIR can parade but so Board directors understand what’s controllable and what’s not.

The stock market is unique in history in its capacity to be insular for extended periods to the presence or absence of money.

If a machine wants to buy something now and sell it in less time than the blink of an eye for a tenth of a penny more, the presence or absence of money manifests differently than in tulip bulbs or cryptocurrencies.

Someone might well pay a tenth of a penny more. You don’t know you’re overpaying when the unit of measure is a tenth of a cent.

Compounded over time and through acceleration by machines manifesting vast seas of tenth-penny buys and sells, the market creates an illusion of efficiency and correctness.

It leads public companies to believe that over the long term, stocks reflect cash-flows.

No, over the long term, your stock reflects imbalances in Supply and Demand translated to the presence of money and the degree of comfort traders feel spending it on things.

I’d rather that wasn’t true!  I’d like to tell you your stock’s value is a prudent read on the difference between your revenue and your expenses.

But it’s really a tulip bulb, in today’s stock market.  It’s a thing that’s assigned a value based on the willingness of people with varying horizons from a few microseconds to years, to trade dollars for it.

And the purpose of the stock market is setting prices of everything in 100-share increments. It’s no longer a market matching equity investors with equity investments.

So, what are you paying for, issuers?  Do you know that just 20% of trading in your stock, or less, occurs at your listing venue?

Tiptoeing through tulips sounds fun.  It is till it isn’t.  To see the tulip effect in the stock market, know how it works. This is the field of gold for investor-relations. And investors.

If you want to know more, the ModernIR team has a client educational session Dec 14 at 130p ET. Send me a note and I’ll share the invitation.

Big Risk Transfer

Index futures expire today. 

Well, if you’re reading November 30, that is.  I’m flying today from Charleston where we’ve spent the month of November to Phoenix for a panel on the rise of thematic investing at the NIRI Senior Round Table conference.

Seems a good time to offer a vital lesson on the mechanics of the stock market. You longtime readers know it already but I hope you’ll forbear repetition.

(Side note: We visited the Heyward-Washington house here in Charleston yesterday where George Washington stayed in 1791. There are letters between Washington and John Rutledge on display.  They had such an elegant and florid way of writing and it may influence mine today!)

Photo courtesy Karen Quast, Nov 29, 2022

Following the implementation of Regulation National Market System in 2007, passive assets began to rise, exploding in the aftermath of the Financial Crisis in 2008.

The link? Reg NMS forced exchanges to share prices and customers, obliterating competitive distinction and turning average prices into an algorithmic pursuit. Passive money tracks average prices. Regulation gave them a distinct advantage.

Since then, Passive Investment at firms like Blackrock, Vanguard and State Street have surpassed actively managed investment in the USA.

These assets track indexes like the S&P 500.  They’re not trying to outperform the benchmark but to track it as closely as possible. So in 2014, the CBOE (formerly Chicago Board Options Exchange) created a futures contract expiring the last trading day of each month to help Passives track their models.

Rather than buying bits and pieces of big baskets of stocks, Passive money managers buy a basket of futures that conform performance to the measure.

The sellers tend to be banks. 

Lloyd Blankfein, erstwhile CEO of Goldman Sachs, said his firm was “in the risk-transfer business.”  When you buy insurance, you transfer the risk of loss – to fire, theft, flood, accidents, etc. – to somebody else.  It’s the same idea.

So big passives transfer the risk of not matching the index to banks, which take the other side of the trade for the same reason insurance companies do.  You’ll have to pay out some claims but the spread between premiums and claims is generally profitable.  It’s worked well for Goldman Sachs, and insurance mogul Warren Buffett.

These same futures contracts have moved way beyond truing up index-tracking.  Trillions of dollars of notional value tie to them.  Investors are transferring the risk of trading losses into futures contracts.

And the reset hits each month-end.

When investors transfer the risk of investment losses and tracking errors to futures contracts, banks package the risk and sell it, and hedge it.

How might that manifest?  For one, in short volume.  The opposite side of insurance against losses is betting on them.

Son of a gun.

Short volume in 2022 is sharply higher than trailing norms and remains at all-time AVERAGE record highs. It’s been about 48% all of 2022 and remains there now.

And you can expect big moves up or down in the broad indices periodically because buyers and sellers of risk-transfer instruments will be forced to cover them. 

It’s very difficult to predict on what days that’ll happen, but we can know the general neighborhood. 

The market surged ahead of Nov options-expirations mid-month.  The market has essentially been flat since that happened Nov 9.

And the market dropped meaningfully after Thanksgiving with attention shifting to the month-end contract.

Yes, observers credit volatility to other factors like China, slowing Fed tightening, plateauing inflation. 

They’re inputs. But here are the facts:  10% of trading volume comes from stock-pickers.  Over 50% spools out from Fast Trading machines with a horizon of a day or less chasing prices around. About 20% is Passive Investment, about 20% risk-transfer, which we call Risk Mgmt.

Transferring risk is twice the size of Active Investment as a price-setter. And machines then chase the prices around.  And almost half of combined volume is short, borrowed.

These mechanics price stocks in the market way more than a multiple of earnings.

This is how the market really works. 

There’s more – exchanges paying Fast Traders to set prices, so they can create data to sell to the brokers in the risk-transfer business, which are required by regulations to buy that data, so they can prove to customers under Reg NMS rules 605 and 606 what they did with those customer orders.

But let’s keep it simple.  Smile.

China and inflation and the Federal Reserve are factors affecting economics and global geopolitics and stability, which are market inputs. But they don’t price the stock market.  The mechanics and rules do, which behaviors adapt to, and reflect.

And they price your stock. They’re most times the reason you trade with your peers, or don’t. They’re why your stock may plunge 20% on missed earnings, or surge 25% premarket on rumors.

That’s a lot to absorb! But if you want to succeed in the stock market, public companies, you must understand how it works. Too many boards and c-suites don’t. Telling the story is not the whole of modern investor-relations. Helping your c-suite understand ALL of the money behind shareholder-value is.  

With that, I’m off to Phoenix.

Deodorant Lid

The situation leading to the deodorant-lid discovery is unique.

We’re in Charleston for the month of November. Yes, it’s dangerous. The odds of getting fat are high. From the Chubby Fish to all the 167s (you who know Charleston know), the restaurants here turn food into a drug. You gain weight.

And you’ll have to run the Cooper River Bridge. We didn’t. We walked it. The image here is of the Yorktown, across the bridge at Patriots Point. It’s an aircraft carrier that saw action in WWII and Vietnam. You should visit it and the Laffey, a navy Destroyer anchored right next to it.

Photo courtesy Tim Quast, Nov 20, 2022

It’ll make you grateful to be free, at Thanksgiving.

So, I was packing two different editions of deodorant coming to Charleston because I was slated to be gone more than a month from Denver. One ran out. I moved to the next one.  And pulling the lid off, I stopped.

It didn’t feel the same.  I grabbed the old one from the trash because we’re in an apartment at the Zero George Hotel and the trash won’t be removed till Friday.

I squeezed the lid of the old one. Inflexible.

Squeezed the new one.


Son of a gun.

The lid is flimsier on the new one.  In fact, the whole container is thinner. The weight is the same, though: 2.7 ounces.

Unilever is giving us less, for more.

If you send millions of these things around, thinning out materials improves margins. Used to be it weighed over three ounces.  So over time, the packaging thins, the amount of product decreases.

The price rises.

That’s called “de-sheeting.” It’s ingenious.

And it’s what comes from rising debt and rising prices. It’s not “evil corporations” stealing from people. It’s businesses trying to adapt to how governments steal from people via inflation – shrinking the money.

Businesses can’t shrink money. They can only shrink the deodorant lid.

There are two basic ingredients for every economic recipe: labor and capital. People and money. If the value of money decreases, money as an input into the recipe for making stuff must increase.

Got that? Money worth less, more of it needed.

Faced with having to put more money to work to make the same stuff, the makers of stuff will try to spend less on labor. People. So wages rise slower than prices.

Congresspeople love to berate “evil corporations.” They’re just trying to adapt to the shrinking value of the money input, which governments alone control.

And so it has been. Wages have not kept pace with prices since the 1970s when the USA abandoned the gold standard defining the worth of money.

At some point, the dam gives way and pay rises.

And prices increase.

And for the time that the increase in pay persists, people pay more for things because they have more money.

And then it stops.

Then they need to have cheap credit to keep paying more for things.

And so it has been. The use of credit has risen dramatically the past 40 years.

To help, the Federal Reserve lowers interest rates. Rates have fallen on a trend line since we left the gold standard in the 1970s.

And businesses try to bump up prices of things to compensate for the higher cost of labor, the diminishing value of money.

To offset any spread, businesses make lids thinner.  Or whatever.

And what happens if the cost of credit goes up?

It’s happening now.

The Federal Reserve is raising rates. So the money is worth less, the cost of labor is higher, and now the cost of the replacement for the gap between the two – credit – is higher too.

The reason people like Ron Paul are consistently wrong about the impact of rising debt and rising prices is they don’t understand how thin a deodorant lid can get.

Businesses find ways to suck costs out of production in the 21st century, and the sustainability of our system depends on the continuity of this principle.

In the 19th century it was the opposite, as I explained here. Make stuff as the value of money stays the same and distribution and production improve and everybody is richer.

If we could apply modern principles to this 19th century notion, we could last forever. A system that depends on making thinner deodorant lids has limited room.

How thin can lids get? I don’t know.

I do know that to fix the problem, we’d have to shrink the size of government by 50%.

Nobody is willing to do that.

So we’ll live with thinner lids. And more short-term tactics.

And we can.

Now, go and eat well, and give thanks!

The Trouble

I don’t own cryptocurrencies or NFTs or other digital assets. Let me just offer that first.

But anybody, in any market, including the US stock market, should understand the risk of manufactured traffic.

I’ll explain.

You all know about the collapse at FTX, wunderkind Sam Bankman-Fried’s (he’s called SBF and I’m not sure it’s good to be known as an acronym) trading platform for content creators.

Photo 227837967 / Ftx © Zhanna Hapanovich | Dreamstime.com

I get how and why he wound up using his proprietary trading unit, Alameda Research, to support the exchange’s currency, a token called FTT. I don’t know if its fraud or foolishness. In any case, it’s unethical.

The reason I can wrap my head around at least some of what occurred is because of what’s happened in the US equity market, and how it works. 

Take Pipeline Trading. I wrote about it in 2011.  It’s gone away.

Reason? It was fined for trading against customer orders (editorial note: You can in fact know now if your shares trade at dark pools here at Finra, and from our partner for institutional analytics, PointFocal).

The fine didn’t bankrupt Pipeline but it led to a loss in confidence.  The market didn’t offer the liquidity it purported to have. Orders dried up, the market shut down.

Let me explain further.  At FTX, the hullabaloo is not just that it’s collapsed and gone bankrupt but that SBF’s proprietary trading unit might have been trading against customer orders, with customer funds held in the firm’s own tokens.

Not good.

For the record, many broker-dealers over the years have been fined in the US market by regulators for trading against customer orders. I wrote about it a long time back.

The problem isn’t that brokers take the other side of orders. It becomes a problem if customers don’t know it.  They think there’s more demand for their goods than really exists.

It’s like building a mall and leasing space to retailers. And nobody shows up.  You’ll do anything to drive traffic.

SBF wanted to establish FTX as global leader in digital assets. He needed a lot of customer interaction. And there was. So long as everything from NFTs to cryptocurrencies boomed.  Big traffic played a role in FTX’s $32 billion valuation.

But when a bear market developed in the metaverse, trading diminished, we can surmise.  Suppose customers were quitting or wondering if they needed to pull out of the mall.

I’m leaving out big details but follow me.

Enter Alameda Research.  What if we just…goose the market a little by demonstrating there’s a lot of liquidity, a lot of action here?

Reminder: This is what Pipeline Trading did. But not with customer assets.

We’re led to believe thus far that Alameda Research, the proprietary trader, may have used customer FTT tokens to prop up the market for digital assets at FTX.

Reminds one of the Federal Reserve using fake money to prop up the economy. Cough, cough. I digress.

The trouble is relying on stuff that doesn’t exist. There wasn’t enough customer demand for digital assets at FTX. That demand was coming from SBF.

And the market unraveled, and the tokenized medium of exchange at FTX collapsed.

The US stock market doesn’t use a token. So that’s good news. But it cannot function without proprietary traders taking the other side of customer orders.

You understand that, right? It’s not dissimilar to what was happening at Pipeline Trading except it’s sanctioned in the stock market.

Here’s what I mean.  Over half the volume in the stock market would not exist, save that it comes from proprietary traders, the equivalent of SBF’s Alameda Research. Exchanges are permitted under rules to pay them to buy and sell. They prop up the market.

Rather than using customer assets like SBF did, these same brokers are permitted by the SEC to create stock to use to trade against customer orders. 

I’ve explained it repeatedly but maybe this context will get the point across better.

No market of any kind can continuously offer buying and selling without some form of artifice and trickery. Physics don’t function that way. There isn’t always, at every split-second, a buyer and seller meeting. 

Without these two kinds of it in the stock market we’d have to go back to holding periodic auctions that line up supply and demand like a cattle auction.  Ranchers bring cattle. Buyers from Swift Amour and JBS show up and bid for the cattle.

You can’t manufacture cattle to fill cattle orders. But you can manufacture stock to fill stock orders because it’s electronic. Maybe every electronic market is subject to this risk, from cryptocurrencies to central-bank debt auctions.

Worth pondering.

I’m not saying the stock market will blow up like SBF. I’m saying it shares some DNA.  And every participant in it, from traders to investors to public companies, should understand that half the market’s volume just props up supply and demand.

It works out fine 99% of the time.

Blood Sport

The only sport bloodier than the MMA Octagon is politics.  And it’s more entertaining!

I don’t know what happened election night yet, as I’m writing from Charleston, SC at roughly 3pm ET Tuesday.  And I don’t know where stocks will finish ahead of the rising blood moon and closing midterm polls.

Photo 168255826 / Elections © Joaquin Corbalan | Dreamstime.com

But I do know where the market data are ahead of the outcome.  On Nov 8, 2016, Broad Sentiment, our scaled 10-point algorithm metering buying and selling by traders and investors, had bottomed near 3.6.

A reading below 4.0 is a strong entry point. And the market was off to races on the Trump victory.

At Nov 8, 2022, Broad Sentiment is 8.0 and leaking down from 8.2, just the fifth “eight handle” in the whole data set we use, back to July 2017.  It’s been a furious momentum market already. Before the election. Not after, as happened in 2016.

And Short Volume, the supply side of the stock market, is 48% of trading volume in the S&P 500.  That’s what the stock market has averaged in 2022, a tough year for stocks.

And if you’re shocked that nearly half the volume is borrowed, don’t be. It’s long been over 40% but 2022 is the highest average we’ve seen since the data set began in 2010.

So whatever happens to stocks into the close today, and tomorrow, Broad Sentiment is peaked, not bottomed.

Forget whether you give credence to our metric, and don’t worry about its construction. Here’s a fact:  Since the Growth Market ended in Nov a year ago (the data say it died in May 2021 but follow me here) – that is, Big Tech stopped powering it – the market declines about 4% over the proceeding 2-4 weeks whenever Broad Sentiment tops 6.0.

Doesn’t mean the market won’t soar if emotional people giddy about midterm outcomes goose equities. But it suggests if the math holds that some weeks out it’ll be down 4%.

On Nov 6, 2018, Broad Sentiment was rallying strongly, topping 6.4 Nov 7. But it peaked by Nov 12.  Stocks then fell. On Nov 4, 2020, Broad Sentiment was bottomed around 3.2, an entry point. Momentum exploded, Broad Sentiment shot over 8.0 by mid-month, and stocks rallied.

Let me explain that eight-handle thing.

I said the stock market topped 8.0 only five times the last five years.  Three of those were during the 2020 Pandemic Mania when people were blowing Covid checks on meme stocks (the last one was Nov 2020). Artificial money lights momentum fires (that burn out worse than they flamed).

One came in Jan 2019 when the Federal Reserve, under pressure from the Trump administration for killing the stock market, stopped shrinking its balance sheet. The dollar weakened, and stocks raced off anew until Feb 2020.

This fifth one is unique because it doesn’t fit with the others. It comes with the Federal Reserve grimly putting the screws to interest rates.

Momentum happens when too much money chases too few goods.  That condition, by the way, is measurable in your stock too.

So, what is it?  Well, it could be the recent rally – especially in blue chips because Big Tech sure isn’t rallying – is an election rally already.  It’s as though the market baked in an outcome in October.

If so, it may mean the market behaves differently in the aftermath of what might be a meaningful shift in the federal balance of power.

And maybe that’s wrong and we’re back to a momentum market.

But I don’t think so.

I think the Federal Reserve needs rates back over 3% not to tame inflation but to be able to cut them to 0% again if the economy starts to unravel.

Foregone conclusion? Not at all. But the stocks of the Pandemic Mania have returned to earth and then some.  It’s not unseemly to suppose an economy that was similarly juiced might do the same thing.

So maybe I’ve got it wrong.  The blood sport is monetary policy.  It’s like Commodus staging reenactments in the Roman Colosseum for weeks on end with real, dying gladiators.  It was meant to alter people’s behavior, steer their mounting unease away.

And will we learn to leave rates high and let things fail so we don’t have manias and flameouts? Nope. No matter who runs Washington DC.

But if you can get past the blood, it’s all pretty sporting.

Fault Lines

Inflation is our fault. 

For context, the Federal Reserve today will boost rates.

Illustration 6751294 © Artaniss8 | Dreamstime.com

The message will be clear: We consumers need to stop consuming, because we’re driving up prices.

We used to understand back when Milton Friedman was credible that inflation is “always and everywhere a monetary phenomenon.

Now we’re told by Federal Reserve officials and economic pundits opining on TV, in print, across social media, that the trouble is “demand must come down.”

In other words, it’s us.

We’re spending too much and if we’d just stop, prices would fall.


That’s the people who created inflation shifting blame.

Inflation – stuff costing more – is caused by one thing: Money.  Give people money for nothing (like playing guitar on the MTV), and they’ll stop working.

Who wouldn’t? We trade time for money. If you can get money for nothing, the time remains yours.

Well, that happened.

With fewer people working for money, there aren’t enough people making products. And prices go up.

But the problem isn’t “excess demand” for stuff. It’s excess money.

You can do an experiment in your own living room to prove it.

Get some poker chips. Take $5 out of your pocket, and get three of your friends to also pony up $5 each.  Give yourself and your three friends five poker chips. Deal out some cards for Texas Hold’em, two face-down to each, and a card face-up on the table.

Now bet.

Now have your Aunt Helen come out of the kitchen and give two of you a bunch more chips.

Now bet again.

Did the people with free chips spend more money?

The problem isn’t the cards, or you. It’s Aunt Helen. Well, it’s the free money.

The party that gave everyone free money – Government, and by extension the Federal Reserve, so Uncle Sam rather than Aunt Helen – is now telling you to stop spending it because you’re creating inflation.

Demand is never the problem.

If people are getting jobs and spending money, businesses hire more people and invest to make more stuff. And other enterprising individuals observe it and get into the business of making and selling stuff too.


And if the value of money is stable, the cost of goods and services comes down.

Yes, correct. Down, not up.

How? Better production and distribution fueling a growing market for goods and services.

I call it the Baker Rifle Rule.  In 1800, Ezekiel Baker sold cool new breech-loading guns to Napoleon for about $100 apiece.  Expensive, back then.  Good guns.

By 1860, you could buy Ben Henry’s lever-action repeater for about $40. More for less.  And by 1894, Sam Winchester’s marvelous gun could be had for around $25.

How could better technology cost less?  Stable currency coupled with improved distribution and production and growing demand.

Demand did not create inflation.

In fact, it’s the broad boulevard to wealth (we just visited the Biltmore in Asheville, largest private residence in the USA, which came from the Baker Rifle Rule – not the Fed, which did not exist then).

Not making more money. Not the way to wealth unless you make it faster than money shrivels (owning businesses, owning real estate).

No, the way to wealth is your money buys more. The few can and will always make more money. The many benefit from the enterprise of the few NOT by taxing and redistributing it, but if the money buys more, not less, over time.

The $100 spent in 1800 on a gun could by 1894 buy the gun, the ammo, and flour, and a keg of beer, and clothes and shoes, and maybe even a wagon and a horse to pull it.

Money went farther.

It’s still true in some economic areas. But much of the stuff we buy like gas and groceries keeps costing more because we can’t expand the market or the distribution or improve production enough to offset how our money doesn’t go as far as it used to.

Got a quarter in your pocket?  See those ridges on the edge? That’s “reeding.” It’s there so you know if it’s been shaved.  That’s how money used to be devalued.

Doesn’t much matter today because our coins aren’t made of gold or silver. But that’s inflation.  It shaves away the value of our money.

And it’s not our consuming doing it.

John Maynard Keynes, the British economist from last century who gave us government deficit-spending called “Keynesianism” said, “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

And it hits stocks too. They go up on “multiple expansion” and they devalue when they shouldn’t.

We shouldn’t lower interest rates to stimulate buying. We should keep them high to encourage savings and let spending take care of itself.

Now, over to you, Jay Powell.

Where’s the Poo

Geese are flying over Denver now, headed south.  Have you wondered if they poo up there? 

Well, wonder no more.  Karen and I were walking in Denver’s Washington Park to the distant honk of traveling geese.  I felt something carom off my ear and shoulder.

I thought, “Those darned squirrels dropping debris again.”

Winnie the Pooh Illustration 160172765 © Patrick Guenette | Dreamstime.com

That happens sometimes.  They’re usually apologetic.

I looked up.  No tree overhead.

And you know how your mind processes vast data instantly?  A panoply flashed through my brain in about 400 milliseconds, ending with my eyes fixed on the passing geese overhead.

Direct hit.  I had been shat upon, shamelessly.

Perhaps gleefully.  My hair stylist said the swans in England where she lived a year would tap on the door in hopes humans would open up and offer snacks.  Smart birds. I suspect geese are smart too.  Capable of laughing.

Which brings me as usual to the stock market.  Machines, like the human brains that made them, can instantly synthesize reams of data.  Much of what actually occurs in the stock market is just this sort of thing.

I’m not suggesting it’s poo, if you’re wondering where I’m going.  But the market can give us poo when we least expect it.

Good friend Joe Saluzzi of Themis Trading, a seminal voice on market structure, the mechanics of stocks, noted yesterday via Twitter that 65% of trades in the stock market now are odd lots, less than 100 shares.

Joe introduced the world to speed traders on 60 Minutes with Steve Kroft a dozen years ago this month. Kroft described these machines as “robot computers, capable of buying and selling thousands of different securities in the time it takes you to blink an eye.”

That’s 400 milliseconds.

That sort of trading is about 51% of volume in S&P 500 stocks the past five days, below the longer average of 53%.  Lower than in 2010 when the machines had a huge advantage.

What’s changed since then is shorting – about 49% of all trading volume right now – and derivatives, comprising 18% of S&P 500 volume.

Because they’re collectively massive and dwarfing investment, derivatives, shorting and the machines can cause stocks to surge or plunge without warning.

Well, there’s warning if you’re measuring the data. We’ll come to that.

So stocks last week had their best week since June.

Well, not really. It came on a day. The stock market was down till Thursday, then exploded last Friday when derivatives expired.

This Monday, new options traded. Stocks surged again.

Yesterday was Counterparty Tuesday when parties behind expired options from last week and new options trading Monday squared the books.  Happens every month.

Yes, weekly options are now massive. But not scythes slashing through stocks. They’re little lightning raids compounding instability. But they won’t drop the bottom out of the market or light it afire.

Monthly resets can. It’s why you must know the calendar.

They set a course for trillions of dollars from parties buying volatility, counterparties selling it and hedging it and leveraging it, and big funds substituting derivatives for stocks or using them to match indices.

In short, what happened the past three days was a giant tug-of-war between the buyers and sellers of volatility that gave way suddenly, surging stocks like a rope let go.   

And there will be an offsetting reaction. 


Tracing the rate of change in Supply and Demand in the stock market offers signals.  The data suggest the cost for hedging with low volatility stocks like WMT, PEP, KO, SJM, CPB and so on, has risen along with the demand for them.

That means big money wants stable stocks ahead of US elections.  Tech is too volatile, even the biggest stocks. Mega cap Tech stocks are more than twice as volatile on average as the stocks above.

And with Bank of America saying 60/40 equity/bond portfolios are on track for the worst year in a hundred in this article on the magic number for retirement, the hunt for stability rocks derivatives markets. Leading the proverbial tail to wag the dog.

It’s not earnings.

It’s certainly not stock-picking. It’s in a sense a battle for the soul of the stock market. 

The battle this time juiced stocks, eliciting euphoria from pundits.  But what happens to the buyers or sellers of derivatives who lost?  They’re forced to sell assets – the stocks that just went up.

But our Demand gauge for stocks is at a level from which stocks have fallen afterward invariably, in a day or two or as many as twenty.

This time? We’ll see.

These are facts about the stock market that every investor, every public company, should know. We can analyze it in fractions of seconds with machines. And that is not poo. 

Short Story

Are traders shorting your stock?

There’s a good article in IR Magazine by independent board director Rosalind Kainyah on what she expects from the company’s IR team.  One data point: Comparative shorting for the company and peers.

The trouble is most Boards and c-suites think only about Short Interest. It’s a 1974 measure created by the Federal Reserve to track the use of margin accounts.  It’s not an SEC metric, let alone one suited to a market that’s 100% electronic, 97% algorithmic.

After the USA left the gold standard in 1971, financial-asset volatility exploded. The Fed feared it wasn’t accurately tracking the money supply. So it created Regulation T requiring a 50% margin in eligible accounts.

Short Interest reports twice per month were born. The measure hasn’t changed in 48 years.

Short Volume is a 2010 measure reflecting the SEC’s passage of a modified uptick rule called Regulation SHO Rule 201.  It defines certain restrictions on shorting stocks and it’s part of Regulation National Market System governing the stock market now.

What’s more, Short Interest is a consequence of Short Volume (there must first be shorted shares before there can be Short Interest). Why meter the consequence if you can measure the cause?

So that’s what we assess – in everything – at ModernIR, applying proprietary smoothing techniques reflecting market rules.  We’ve been tracking that data since Finra implemented regulations for brokers about reporting it.

We call Short Volume “Supply,” because it’s the stock market’s supply chain. That is, most large orders to buy or sell are in part or in whole facilitated by borrowed stock.

(EDITORIAL NOTE: The SEC wants a “continuous auction market” and so exempts market-makers from having to locate shares to short. If you want to know more, Google “SEC market-maker short exemption” and click “Key Points About Regulation SHO – SEC.gov”.)

Source: Market Structure EDGE Broad Sentiment data, Sep 20, 2022

When Demand is rising and Supply is falling, stocks rise. That condition manifested briefly when the market hit 2022 highs to end March, and again from June option-expirations to August options-expirations (SEE FIRST IMAGE).

The reverse punctuated the 2022 low for stocks into June options-expirations. That was a record high for Supply.

Until now. 

Currently, 52% of S&P 500 volume is short, borrowed. That means a minority, 48%, is stocks the buyers and sellers own.

Take a good look at the image.  Demand is decent, over 5.0 (baseline for rising prices). But the supply chain is overloaded.

Your Board and c-suite would no doubt like to know the Supply/Demand balance in your stock, your peers, your sector, industry. 

Speaking of adding value, the client-services team at ModernIR hosted a panel on using market-structure data in IR. Thank you, Clay Bilby, IR head at Palo Alto Networks (PANW), and Matt Garvie, VP IR at US Xpress (USX), for sharing your approaches.

While that panel was unfolding, I was in New York to present at the IR Workshop for the American Gas Association, and I focused on using data to engage the c-suite and Board. You can see a condensed version of my slides here.

Data is king. 

Back to the Short story, VIX options expire today with the whole market shorted, and Jay Powell hiking rates 75 basis points or more.

The market might rise, even so.

I’m not saying it’ll happen! But there will be effort by the parties who are NOT short to move the market in a way that mitigates risk.  It won’t surprise me.

The central tendency though is that a market with topping Demand well shy of historical tops that’s simultaneously the shortest on record will fall. 

We could take a drubbing.

It will be essential to watch the supply chain, Short Volume.

Unless and until those levels recede in a sustained and meaningful way, the bias of the market will be down.

And it doesn’t matter what the news is. Market Structure tells you what everyone thinks – longs, shorts, global macro, asset allocators, stock pickers, risk managers, all of it.

Everything occurring in the stock market rolls up into Demand, and Supply.

That same data in your stock will tell you ahead of results what’s likely to happen, no matter if you beat or miss.  It will tell you if investors buy your stock on non-deal roadshows. It’ll tell you who to call this week among your holders.

If the stock market rallies today, tomorrow, Friday, know it’s quicksand unless Short Volume comes down. Without a supply-chain change, the market will be lower a week from now than it is today.

Maybe a lot lower. That’s the short story.

Photo courtesy Tim Quast, Sep 19, 2022.

PS – And this second image is the view up 8th Avenue from W 43rd in New York City Monday Sep 19 from the 38th floor of the Westin. That tallest building is the latest Billionaires Row addition on West 57th. The penthouse is yours for $250 million.