What’s Changed

I still rue my decision Friday Mar 13 to delay skiing in Steamboat till the next day (it was Fri the 13th after all). The next day the slopes closed for the season.

It’s a reminder not to put off till tomorrow what you can do today. And it raises this question:  What’s changed in the stock market since fear drove us to ground?

Let me wrest your eyes from the headlines over to what the money is doing, demographically. Under Regulation National Market System, exchanges can’t have a “no shirt, no shoes, no service” rule for who buys and sells stocks in the store. Reg NMS requires fair access for all.

We can debate whether giving the public a cheap, slow look at stock prices and volume – the consolidated tape – while selling the pros with fat wallets better, faster and deeper data is fair access. And exchanges handle only about 60% of volume.

But I digress.

On Jan 20, 2020, about 13% of trading volume came from Active Investment, your Benjamin Grahamers, your stock-pickers.

About 16% tied to managing risk and leveraging returns. This is who’s on the other side when there is buying or selling of puts and calls. Or, say, a bank selling a swap for the returns in Financials, then offsetting the risk by shorting Consumer Staples.

Around 24% was Passive investment like quants and index funds.

Nearly 47% was Fast Trading, machines with a horizon of a day or less modeling the math of changing prices.

By Mar 30, coming off the current market bottom, boy had behaviors changed.  Active Investment was up 8% even as volume had exploded to record levels.  That means Active money was buying the bottom, value-style.

Passive Investment tracking the mean, or following global macro factors, or parrying volatility risk was rocked off the balance beam. It plunged 29% as a share of volume.

Moving in opposite fashion, Fast Trading exploded to 57% of trading volume, up 21%. This is what was driving record trading.  WMT, Sam Walton’s globe-crushing consumer staples empire, was averaging 45,000 trades daily Jan 20.  On Mar 30 as stocks were boomeranging out of pandemic hell, it was averaging 146,000 trades daily – an astonishing 224% increase.  Blame Fast Traders.

And finally, Risk Mgmt, the counterparties to derivatives and borrowing for leverage that depend on future prices, dropped 25%.

These behavioral changes describe what happened better than all the headlines, all the Daily Pandemic Updates with Dr. Fauci and team, the Death Clock ticking on the right side of the TV screen, all the Federal Reserve actions, the 40 million people out of work, the 50 million getting paid by loans from the Fed instead of revenue from the job.

Really, 50% of the market’s value vanished as the engine of today’s equities, Passive Investment and the implied leverage in Risk Mgmt, imploded like an unused football stadium where demolition charges change it in seconds from the Roman Coliseum to a pile of steaming dust.

But the market didn’t lose 50% of its value.

Exactly.  You’re catching on.

About 21% of the market’s rebound is speculation on the tick data.  Another 8% is Active investment, stock-pickers putting in a bottom on Fed action, American resilience.

Maybe only 8% of the bounce is real.  Regardless, the combination gives us a 30% (close to it) recovery for the S&P 500.

What about now? At May 20?

Active Investment remains the same. Zero percent change. Risk Mgmt is unchanged too, 0% difference from Mar 30 to May 20. Passive is up 12%, Fast Trading down 4%.

Apply these data to what’s ahead.  Active money is content, committed to a “bottom is in” posture. Risk Mgmt is expensive and uncertain.  Passive money is trying to get its mojo back but it’s half what it was.  And Fast Traders gaming those moving parts, the prices of stocks, are retreating, uncertain.

You’d be hard-pressed to see how these data take us to new highs. You’d also say they don’t smack of another smackdown.

But the pandemic data are still here. They’ve not changed much the past six weeks. Market structure is like water. Disturbances roil it.  When those events pass, it reverts to stillness.

The data are still sloshing.

If the waters are troubled, then even as commuter traffic picks up, gas prices tick up, the city stirs again, keep one eye on the deep. What’s changed at this point is bigger than what’s returned to normal.  Keep your hands inside the gunwales.