What Is The Market Telling Us Right Now? Market Structure Edge

Benzinga

Tim Quast, Founder/CEO, ModernIR and Market Structure Edge  ModernIR is a financial technology company that uses Big Data analytics to translate complex market data into trading and investment behaviors for public companies. ModernIR pioneered behavioral data-analytics for IR market intelligence and invented Market Structure Analytics™ for issuers and is now the largest provider of quantitative equity analytics to FUS-listed public companies. ModernIR also launched Market Structure EDGE in 2019, quantitative analytics for buyside portfolio-shaping.

Transcript

00:00 Let's take a look at market structure edge. Let's take a look at what the market is showing

00:04 Have we peaked on demand and short supply?

00:07 Increase in here. I know I want to see the grass. Let's take a look underneath the hood

00:12 So well, I would I would like to highlight two things that I think are important to understand if you're you know

00:19 If you're an active trader and for those who who are new to market structure edge

00:25 This is all about the rules and the mechanics of the market. That's what it is. Not technical. It's not fundamental

00:30 It's looking at supply and demand

00:32 Which I mean, it's the principle underlying everything. It's the principle behind

00:37 The surge in interest rates the Fed has it has sold

00:42 800 billion dollars worth of securities over the last year and I'm thinking Dennis

00:48 I don't know if you think about this but what a what a colossal loss that would be from a paper standpoint

00:54 You're a magic folio. I just cannot imagine and they don't mark in the market

00:58 I I don't know because they you know, the Fed does not present financials under generally accepted accounting principles

01:05 So we don't know right but to lead into supply and demand in the equity market two things to to look at and

01:12 We you know, we fully expected a surge for equities because of this

01:18 Zooming in this this gray part of the graph here is

01:23 SPY so it's a proxy for the S&P 500 the green part of the graph. That's not nearly as volatile

01:29 that's an algorithm that tells us about buying and selling by investors and traders and

01:34 When it peaks and begins to decline the market tends to fall when it bottoms and begins to rise the market tends to rise

01:41 It can be interrupted by options expirations. That's why it's good to know. Well, here's where we were a

01:47 Monday a Monday ago, right? Maybe it was - yeah - Mondays ago

01:52 I think it was two Mondays ago and I was talking about how well I think you want to be in tech

01:57 Because we can look at how tech was recovering the broad market had gotten below that green line

02:03 So it's just it's just a quantitative measure, but there's a very high probability that stocks rise off of that

02:09 That's what you want to do. You want to capture gains and avoid losses

02:13 That's how you that's how you outperform the market by trading the same things that everybody else owns

02:18 But if you can capture the gains and avoid the losses you will outperform and that's what we're trying to do

02:23 So here's where it is. Now. It's barely back above the green line

02:27 It's not above 5.0 the bearer nexus of supply and demand

02:31 It has been helped by a decline on the supply side, but it's still 50% short

02:38 So I look at this and say there's a high probability that the demand side peaks right into options

02:44 Expirations it did that back here in September right before

02:48 options expirations and remember back here Tesla went from

02:52 235 to 276 right into that

02:56 But then it plunged again, right?

02:58 So you that it's very important to know what the supply demand equation is so that you protect yourself

03:05 Traders, so I look at this and say that's the risk Mitch. It's that we peak once again

03:11 Maybe very weakly into options expirations and the supply side reverses now

03:16 I don't know what it's gonna do. Maybe it continues to fall. It stopped falling on Friday, though

03:22 And let me show you one other thing you can interrupt at any point. No almonds. Let's let's look at SPY

03:29 So SPY is that is that price proxy? Let's look at the supply and demand in SPY

03:36 And here is why?

03:38 Tech falters tech is a very important part of the S&P 500

03:44 The SPY simply tracks it at half the volatility of the average stock. Well demand is good. It's right at five

03:52 That's where you expect SPY to be

03:54 SPY should spend a lot of time at five when it drops below five be very careful

03:59 But look what happened on the supply side

04:03 Yeah from 46% short, which is very low for SPY because it's a long trade

04:09 I trade leverage long and short s S&P 500 instruments and it's gonna show up but look at that

04:17 We went from 46 to 61 percent short in one week and look what it did to the price

04:23 So this is and that's a high inverse correlation between supply and SPY is price like almost

04:33 89% Tim do you think this is off the backs of option expiration or more the uncertainty in the macro environment with kind of the

04:41 Geopolitical events. I think it's more about earnings best

04:45 You know that the problem with the market is that it's 98%

04:50 Algorithmic maybe even a little higher than that Dennis you might that's those are the you know

04:55 I take those figures from what the exchanges tell us about the use of order types and we're right there

05:02 And if 20% of the volume is coming from asset allocation over 50% for machines just that trade price

05:09 So there's 70% of volume isn't thinking about

05:13 Geopolitical risk unless that's an input in some kind of factor model. So yes, Mitch

05:20 I think it's much more about positioning to bet directionally around earnings

05:25 But what would this tell you?

05:28 I you know, you look at this and say you can see they're high expectation for q3 earnings that it could be

05:33 Record s&p 500 earnings. I don't know what it's gonna be

05:38 But I'd look at SPY and say people are not super bullish and that maybe it doesn't turn out the way that we expect

05:46 So these are that's why you want to know those things in advanced traders helps you to protect yourself

05:51 Look, I don't know what's gonna happen that can reverse but if you see that you want to be cautious

05:55 I often avoid this period entirely

05:58 Because I don't like to lose money

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