Looking At Short Volume In The S&P 500 Over The Past Year, What Is It Saying About Stocks Now?

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Tim Quast, Founder/CEO, ModernIR and Market Structure Edge

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Transcript

00:00 You know, there's a lot of talk about short interest

00:02 and short squeezes and short volume and past year,

00:07 actually really since COVID,

00:08 since we had those short squeezes.

00:11 If you're looking at the short volume,

00:13 let's go a little bit longer perspective over the past year

00:17 in the S&P 500 index, what's it saying about stocks now?

00:22 - Well, let me, thank you for asking that question, Joel.

00:24 Let me share my screen and I'll tell you how I think.

00:29 I'm not saying it's correct,

00:32 but it does reflect the way that the market works.

00:34 And as the edge mob knows,

00:39 and the pre-market prep audience here

00:41 for Market Structure Monday knows,

00:43 we put a lot of focus on short volume, not short interest.

00:48 And just to distinguish between them,

00:50 short interest is a 1974 measure.

00:53 I'm not saying there's not some merit to it,

00:56 but it predates everything that the market reflects today.

01:01 I mean, there was nothing electronic until 1986

01:05 when the Cincinnati Stock Exchange

01:07 became the first all electronic market.

01:10 And so, and then, you know,

01:12 you add in all the things that have occurred since 1974.

01:15 So short volume is the dataset associated

01:18 with the modified uptick rule implemented in 2010.

01:22 And it's overseen by FINRA,

01:24 but it's a great way to think about the supply chain

01:26 of the stock market.

01:27 We track it pretty closely, you know,

01:29 is it, and what's the trend in it,

01:31 and how does it rise and fall,

01:34 and how does that affect the market?

01:35 And here's how to think about it.

01:38 So I have gone back a year.

01:41 So in fact, just a little bit more than that

01:44 across this chart,

01:46 but I'll tell you what this is showing us.

01:49 I'll zoom it in as much as I possibly can here for us.

01:53 So this is the SPY.

01:56 The gray part of the graph is the price of SPY.

02:00 So, you know, it's gone up from, you know,

02:03 392 to whatever it was on Friday.

02:08 - 445, yeah.

02:10 - Yeah, called 445.

02:11 This is our algorithm called demand,

02:16 market structure sentiment.

02:17 It's a 10 point algorithm metering, buying and selling.

02:22 And it's a pretty effective way to understand

02:25 short-term highs and lows in the market.

02:27 There are a variety of ways.

02:28 This is a pretty effective way.

02:30 And here is short volume.

02:33 And look at this.

02:33 The trend line has continued to run up for the whole year,

02:37 and it's over 50% right now.

02:39 It's 51% of all trading volume in the S&P 500 stocks

02:44 is short or borrowed or created by market makers.

02:50 And so what could you generally conclude?

02:53 Well, you could generally conclude

02:55 that there is a short bias.

02:57 When it drops, you can see right in here,

03:00 this period of time, it was well below trend.

03:03 And what did the market do?

03:04 It ran up.

03:06 As it returns to trend and moves a little higher,

03:09 the market struggles.

03:11 And you could go back in time

03:12 and see the same thing was true here.

03:14 So back at the banking crisis, short volume hit,

03:18 it was 52% of the market.

03:20 And this is where the market bottomed.

03:22 As it came down, the market rose.

03:25 Come back over here to where we had the,

03:29 the low for the market was in October of last year.

03:32 I forget exactly where we were,

03:34 but let's call it 3,600 on the S&P 500 or SPY 362, 363.

03:39 And look at short volume.

03:46 Right before that, it was extremely high.

03:49 Then demand bottomed and the supply came down

03:53 and the market rose.

03:54 It's a very good indicator.

03:56 And so if we looked at it now, what would you expect?

03:59 Well, there's something interesting about it here

04:01 that is different from those periods of time.

04:04 Demand is actually very near a market top.

04:07 That red line for us is a very good indicator

04:10 of a short-term top for stocks.

04:12 Statistically, it's very reliable.

04:15 So the rate of return when the demand meter

04:20 hits that red line is 0%.

04:24 I mean, if you add up all the days over that,

04:26 this period of time that the market rises

04:29 when the demand level rises over that red line, it's zero.

04:33 It may take a little while,

04:35 but it's a great indication of a short-term top.

04:39 And then generally, supply will fall as demand rises.

04:44 And then when demand falls, supply rises.

04:47 And it's kind of the opposite here.

04:48 This is interesting, Tim.

04:51 Of course, with options expiring this week and next,

04:56 and of course, a large S&P quarterly index rebalance,

05:00 and you're starting to see a little bit of some toppings

05:02 showing up, at least in the data.

05:04 How would you be looking into going into this week and next?

05:07 Yeah, so let's do this.

05:09 I'm gonna show you this calendar.

05:13 So here's the expirations calendar.

05:16 And traders, this is a good thing to know.

05:18 You could go to the Options Clearing Corp

05:20 and look up the expirations calendar.

05:22 You could get it from Edge.

05:24 Just go look under resources,

05:26 and you'll see the one that we use

05:28 at the corporate business called Modern IR.

05:31 But here's September.

05:32 So this is what Mitch is referring to.

05:36 Okay, so you have demand peaking, supply at 51%.

05:40 That tells us that people have a short bias.

05:43 If you're a global macro hedge fund,

05:46 you are more short than long in all probability.

05:50 And all of these instruments are gonna reset

05:53 starting Thursday with AM-dated index options expirations,

05:57 triple witching on Friday,

05:59 plus quarterly index rebalances for the S&P 500

06:02 and a host of others, including the NASDAQ.

06:05 The NASDAQ runs over 100,000 indices.

06:09 Then on the 20th are VIX expirations.

06:12 And the period between is a great arbitrage straddle

06:16 between one instrument and another.

06:19 And so all of this is occurring

06:20 as supply rises and demand peaks.

06:23 I don't know what's gonna happen.

06:25 What we do is look at that data

06:27 to understand what's likely to occur.

06:30 So if demand falls and supply continues to rise,

06:33 we are gonna have problems, 'cause it's already at 51%.

06:38 Now maybe it reverses,

06:39 but this is the great way to get an immediate read

06:43 on what big institutions that have a great deal

06:47 of risk management data and information are doing.

06:50 And so we're gonna look at that and say,

06:52 well, how does their posture change?

06:54 Are they more short or less short?

06:57 Are they committing more money to equities or less?

07:00 Now, generally, if the market demand peaks into expirations,

07:04 the market has a propensity to decline on the other side.

07:08 I'm not saying that's gonna happen.

07:10 It's just a central tendency.

07:11 So Mitch, that's a long-winded way of saying we'll see,

07:16 but we'll know what data to look at

07:18 to draw good conclusions.

Looking At Short Volume In The S&P 500 Over The Past Year, What Is It Saying About Stocks Now?

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