I’ve just updated my Keeping Score page for February 2019.
I’ve updated my Keeping Score page for January’s movement in the S&P 500.
daily liquidity and price movements
Liquidity has a lot of different meanings. Right now, though, I just want to write about what I think is making stocks yo-yo to and fro on any given day.
The default response by market makers–human or machine–to a large wave of selling of the kind algorithms seem to trigger is to move the market down as fast as trading regulations allow. This serves a number of purposes: it minimizes the unexpected inventory a market maker is forced to take on at a given price; it allows the market maker to gauge the urgency of the seller; the decline itself eventually discourages sellers with any price sensitivity, so the selling dries up; and it reduces the price the market maker pays for the inventory he accumulates.
A large wave of buying works in the opposite direction, but with the same general result: market makers sell less, but at higher prices and end up with less net short exposure.
From my present seat high in the bleachers, it seems to me the overall stock market game–to make more/lose less than the other guy–hasn’t changed. But we’ve gone from the old, human-driven strategy of slow anticipation of likely news not yet released to violently fast computer reaction to news as it’s announced.
Today’s game isn’t simply algorithmic noise, though. Apple (AAPL), for example, pretty steadily lost relative performance for weeks in November, after it announced it would no longer disclose unit sales of its products. Two points: the market had no problem in immediately understanding that this was a bad thing (implying humans were likely involved) …and the negative price reaction continued for the better part of a month (suggesting that something/someone constrained the race to the bottom). As it turns out, decision #1 was good and decision #2 was bad. Presumably short-term traders will make adjustments.
On the premise that dramatic daily shifts in the prices of individual stocks will continue for a while:
–if investors care about the high level of daily volatility, its persistence should imply an eventual contraction in the market PE multiple. Ten years of rising market probably implies that this won’t happen overnight, if it occurs at all.
–individual investors like you and me may have more time to research new companies and establish positions, if the importance of discounting diminishes
–professional analysts may only retain their relevance if they actively publicize their conclusions, trying to trigger algorithmic action, rather than keeping them closely held and waiting for the rest of the world to eventually figure things out
–the old (and typically unsuccessfully executed) British strategy of maintaining core positions while dedicating, say, 20% of the portfolio to trading around them, may come back into vogue. Even long-term investors may want to establish buy/sell targets for their holdings and become more trading-oriented as well
–algorithms will presumably begin to react to the heightened level of daily volatility they are creating. Whether volatility increases or declines as a result isn’t clear
I’ve just updated my Keeping Score page for full-year 2018, 4Q18 and the month of December. Uglier than I’d imagined it could be. Where to from here?
I’ve just updated my Keeping Score page for September, 3Q19 and year-to-date. Newly-created Communication Services is the monthly leader.
Keeping Score tomorrow
a new S&P 500 sector breakout
Announced last November, a new S&P sector arrangement went into effect last Friday.
Telecom, with only three constituents and about a 2% market weighting, disappeared and was replaced by the new Communication Services sector.
The latter contains former telecom names + enough heavyweights from IT (e.g., Facebook, Alphabet, Activision, Electronic Arts) and Consumer discretionary (e.g., Disney, 21st Century Fox, Comcast, Netflix) to give the new sector a total of 26 constituents and about a 10% market weighting–clipping a total of eight percentage points from IT + Consumer discretionary.
revised overall sector weightings:
IT . 21%
Healthcare . 15%
Financials . 13.3%
Consumer discretionary . 10.3%
Communication services . 10%
Industrials . 9.7%
Staples . 6.7%
Utilities . 2.8%
Real estate . 2.7%
Materials . 2.4%.
–Telecom was a mature sector–if sector is the right word for three stocks–with large, high-dividend companies in it. So it had defensive characteristics. Not Communication, though, which contains a bunch of high-multiple, low/no yield components.
–The old Wall Street saw is that any sector is in for big trouble when it breaches 25% of the S&P 500’s weight. That’s no longer the case with IT, but the change is obviously artificial.
–Splitting the index sectors into highly cyclical, somewhat cyclical and defensive comes out like this:
Highly: Materials, Industrials . ~12% of the S&P
Defensive: Real Estate, Utilities, Staples . ~12% of the S&P
Somewhat cyclical: everything else. ~76% of the S&P.
Nothing has really changed, but parsing it out like that makes the index look like it has almost no defensive characteristics. The lower weight for IT makes the index look less risky: this does the opposite–if only by about 2 percentage points.
–There’ll be new passive ways to bet on the Communication sector
I’ve just updated my Keeping Score page for the end of the stock market “summer.” …continuing S&P 500 strength.