August 30, 2023

The Tides

What if the stock market has tides like the sea? 

I’ll give you some data – as is my custom.  In the past six years, the tides of the stock market have been all the way out – low tide – 29 times. It’s the data we’ve studied since developing a universal solution in 2017 (though we have this sentiment data back to Jan 2012).

There are about 1,450 trading days since latter 2017. Divide 29 by 1,450. Stocks reach that sort of bottom only 2% of the time. And every single time that it occurred, including now, stocks have risen.

Photo 140502745 © Mark Hannah | Dreamstime.com

Now, twice gains were fleeting (both times in 2022). But those are good odds.  And if as a public company you report earnings during those periods, the probability that your stock rises – no matter what you say – is high. A rising tide lifts all boats.

Every stock in the Low Volatility portfolio we track rose yesterday, and the gains were virtually all the same – about 0.4%.  They’re low volatility stocks. They’re not supposed to rise $20 like NVDA.

By the way, I said Monday on a Benzinga web show called Premarket Prep where I do a routine “Market Structure Monday” segment for active traders that NVDA was the only stock in the market meeting certain key Momentum characteristics.

I said the probability was that if traders had bought NVDA at $500 and seen the stock plunge from that level “you’ll probably make it back.”

I wasn’t gambling. I was looking at the math.  NVDA moves about 5.5% per day from low to high. It had excessive demand, insufficient supply. The probability that it might rise 10-15% in 2-4 days was very high.

The stock was around $450 at one point Monday and closed over $468. Yesterday it was over $490 intraday and closed at $487.  Again, I was looking at the tides. Not the fundamentals.

As an investor, one would want to be in the market when there’s a 98% or better chance of gains. And out when the opposite is true. There’s a nearly 100% chance that when the tides have come all the way in, Demand has peaked, that stocks will fall.

Now, suppose as a public company you’re going to CRUSH earnings. Like NVDA did.  When the company reported, the tide was still going out.  But it reversed two days later.

Frustrating and head-scratching for a CEO, CFO. But a fact of how the stock market works. And few investors and public companies are paying attention to the tides.

If the tide is going out, and you’re going to have a killer quarter, you need to adjust your expectation and plant a bunch of value key words in your earnings release. And don’t trumpet your comparatives.  There’s no need. Put a table in and let people read it. The humans know. The machines don’t. And the machines just want to arbitrage you.

Your thinking about reporting earnings needs to reflect contemporary facts about market structure. Stop acting like it’s 1995 and all the money in the market is fundamental. It’s not. Nearly all of it is something else – and 50% is borrowed, short.

You know the saying about swimming against the tide? It’s how you drown.  No amount of operational brilliance will spare you if the tides are sucking stocks out to sea.

The high tide turned in US stocks July 25. On a ten-point scale, Demand – high tide – was at 6.7 the day before, and receded to 6.6. During earnings season.

And the tides went out for several weeks, all the way to Aug 24 when the tide stopped going out at 3.8 on that same scale, a level seen only 28 previous times since mid-2017.

And 100% of the time, the market has risen afterward.

This is not timing the market, investors. It’s being wise as a serpent (and meek as a dove if you want the whole bromide).

And public companies, this must become part of how you manage earnings cycles.  Watch the tides. Use key words.  Know your Demand and Supply. Know your characteristics.

It’s not how you tell the story. It’s how you surf the tides.

So, what’s next? I don’t know. Sometimes when the tide comes in, it lasts a long time.  The tide was last 3.8 Mar 27. It didn’t recede back to that level till last week.

In 2022, the tide was unstable. In July that year, it receded to 1.5, the lowest level since Mar 2020, which is the all-time record at 1.3. But it roared to 6.4, stalled, jumped to 7.7, and fell apart.

What’s about this time? We’ll find out. The beautiful thing about math is it never postures. It’s a tide. 

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