Did you know AMD came within a hair of $900 billion of market cap Monday?
It was back down to $850 billion yesterday after what Bloomberg cleverly called the “Chip Wreck.” The Wall Street Journal wasn’t quite so original, calling it the Tech Wreck.
And it’s a stark illustration of “Market Structure,” the mechanics and plumbing of the stock market.
Shouting “Market Structure!” in a crowded room is against federal law because few things will so rapidly clear a room. Screaming “fire!” doesn’t work nearly as well.
The thing is it works. Market Structure.
I was on with my Premarket Prep friends Monday and warned about what Big Tech signaled might happen to stocks. If you’ve got the time, have a listen.
The warning that AMD might not make it to $1 trillion like Elon Musk (that’s on hold now too) came not Monday but June 3.
What might you have known about AMD as an investor on June 3? Short Volume rose 20% in about a week. That’s a big “supply side” move.
Short Volume is one of the most important market metrics and 98% of investors don’t understand it and probably have never heard of it.
They think it’s Short Interest. That’s a 1974 indicator that tells you about shares borrowed and sold short on the probable expectation this or that stock will fall.
It’s about 2% of S&P 500 float. How could that be meaningful?
Exactly.
And it only captures shorting done according to 1974 rules. It omits the colossus of shorting that exists under 2011 rules called Reg SHO.
That’s the first thing. All investors, and all members of the c-suite and Board and investor-relations department at public companies should understand it too.
Because it’s half the volume. Not 2% of float.
And it’s just one part of what happened to AMD. Had you looked at price and volume, you’d have had no idea. AMD had big volume on June 5. But June 8 was the day that mattered more.
On June 8, after high Short Volume, Demand declined. Rising shorting (or Supply), falling Demand. Demand is our proprietary measure of buying and selling in stocks: 5.0 and better, stocks show a strong central tendency to rise. Below 5.0, stocks tend not to do as well. If a stock averages Demand of 4.0, it’s a near a certainty it’s not rising.
AMD still had strong Demand – 9.0 on a 10-point (normalized) scale. AMD had Demand of 10.0 pounding into the ceiling from Apr 13 all the way to May 18, uninterrupted. We could see that in many chip stocks.
AMD Demand dropped to 5.2 May 22 and spent two days there and resumed rising. Price won’t tell you anything about Demand.
This time, Demand was at 10.0 only five days before declining.
Whoa.
Big change in flows, is what that means.
Algorithms, which execute nearly all trades, much of it just scheduled, automated, are designed to deceive (listen to my all-time favorite Ted Talk on algorithms, which has a great trading vignette). You can’t tell that the end of a run is coming by looking at price because the price won’t fall until the rotation, the slowdown, is already done.
By then it’s too late.
Right now, AMD Demand is 7.2 and rising. Short Volume has slipped to 48%. So why did the stock drop $50 billion yesterday? Because Demand is mushy, Supply is comparatively high. Unless those conditions rapidly reverse, pressure will worsen.
And it’s not rational behavior. It’s got nothing to do directly with expectations for AMD’s success, the long-range demand for chips to power AI. It’s more like water. Weather.
Water flows and slows and surges. So does money. Weather manifests in patterns. So does money.
Why the heck am I not writing this blog from my private Ionian island if it’s so great? Because most people don’t understand “market structure” and don’t want to. Yet it’s the secret to navigating this market, as both a public company and an investor.
Maybe the light will go on. Meanwhile, we have done just fine, thank you, with the part of the market we’ve captured. It’s just that the market is oh, so very large.
Anyway.
I don’t know if these shoals upon which chips have presently foundered will prove to be only a sandbar. MU reports today and maybe things reverse. I do know it’s good for low-volatility value equities, because Passives will need them (want to know why? Ask me.).
And I know the market’s Context – its cadence and calendar. If money is going to change direction, it does so at predictable points. Like well before quarterly index rebalances and even the giant SPCX IPO (which, like every other IPO in the past year, fell below its IPO price yesterday).
And before quarter-end, so they can use index options resetting June 30 for protection. You have to make those decisions June 1. And that’s where all the Growth and Value patterns – son of a gun – changed.
If you would like to know more, investors, sign up for our free daily Market Desk notes here. And public companies, let us offer you a strategy for this market. It works.
