October 26, 2022

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. 

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