What Does Market Structure Tell Us About What Might Happen In The Next Week?
Tim Quast, Founder/CEO, ModernIR and Market Structure Edge looking at market structure for the week ahead.
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00:00 This market is off and running.
00:01 Is it seasonality?
00:03 Is it just the fact that everybody's just got
00:06 the bull hat on and the bears have gone to hibernation here?
00:10 And what do you see for the next week?
00:12 And then also I wanna look at your further outlook
00:15 into January here.
00:17 What does market structure say about the next week though?
00:19 - So I'll show you what the math indicates,
00:24 but here's my general assessment, Dennis.
00:28 And I think about what the money is doing.
00:32 I always say that if you wanna understand the stock market,
00:34 you have to understand how it works.
00:37 You have to have some baseline in market structure
00:40 because that's how prices are set.
00:42 And number two, what the money is doing,
00:44 which is a point of continuous frustration for me
00:48 with big public companies because they don't seem
00:51 to understand what the money's actually doing.
00:53 Here's what it's actually doing.
00:55 We've talked about this before.
00:56 So those who hear me, apologies for the repetition.
01:01 It is partly due to my deteriorating mental faculties
01:05 because I'm getting old, but it's also purposeful.
01:08 So you have to realize that 70% of assets
01:11 at the seven largest money managers
01:13 in the United States run on models.
01:15 It's not that the market is a continuous reflection
01:20 of people's views of fundamentals.
01:23 Big models determine what the exposure
01:26 to equities is going to be.
01:27 And they make changes.
01:29 And then you juxtapose that with market structure
01:32 where there is no liquidity.
01:34 I mean, it's just unbelievable.
01:36 I traded LUV on Friday.
01:41 I bought it, dumped it, bought something else.
01:43 I bought CCL and I bought SPXL
01:45 and the market pulled back to level.
01:47 'Cause the bias in the market is clearly long.
01:50 So I knew that would be a profitable trade.
01:53 And my trade for LUV, I own 900 shares of it.
01:56 And when I sold it, it split into 15 different trades
02:00 for as small as six shares.
02:01 So I can barely get in into and out of a stock.
02:06 Imagine what BlackRock, Vanguard
02:08 and State Street are going to encounter.
02:10 So if the models come to the end of October and say,
02:13 well, the market's down 10%,
02:14 I think we should increase our exposure
02:16 to US equities by 5% because we look
02:19 at the global macro models, we feel pretty good about it.
02:22 You do that one thing, that one thing
02:25 and it can drive the market up 10%
02:27 and then people misconstrue that as,
02:30 okay, we're off to the races again
02:32 and it's a bull market and everything's awesome.
02:34 Well, it takes that long.
02:36 And the irony, and I'll finish with this,
02:39 is that we are going to rebalance
02:40 and Joel, you've touched on this.
02:42 The S&P rebalances reflecting the reconstitution
02:47 in early December will occur between this week and next week.
02:51 It's technically around the 18th of the month
02:56 but Thursday options start expiring
02:59 and they extend into next Wednesday, the 20th.
03:03 So in between there, the models now are all overweight,
03:07 out of whack, things have moved like pistons
03:09 all over the place and everybody's gonna try
03:11 to square the books.
03:12 Now, I don't know what's gonna happen.
03:14 We can talk about that.
03:15 But to me, Dennis, what the market tells us
03:18 is about what the money is doing
03:20 and about the paucity of liquidity in the market
03:23 and really little else.
03:25 And you have to be careful.
03:26 And I'll show you how to know, traders,
03:29 when you should be careful.
03:31 So here, I'm gonna go to this
03:32 because here's how to know, traders.
03:34 If you wanna know when the turn will come,
03:38 this is the way to see it.
03:40 So as long as, I'm looking at just this,
03:43 this is a portfolio and it's got five stocks in it for today
03:47 and this is the slamming into the ceiling demand,
03:50 demand at 10 and the supply side has been trending down.
03:54 If that condition continues, the market rises.
03:57 It is as simple as economics.
04:00 When there are supply demand balances, prices rise.
04:04 And it's true in anything, including the stock market.
04:07 When those conditions are about to change,
04:09 you will see one side or the other begin to deteriorate.
04:13 Sometimes it's the demand side,
04:15 sometimes it's the supply side.
04:16 Well, look at this.
04:18 Look what supply is doing in this portfolio.
04:21 As we start to move toward options expirations,
04:24 the supply side is starting to increase.
04:27 If there's any faltering in demand, the market will decline.
04:31 This is why, Joel, you and I talked about this.
04:34 I said there was a 67% mathematically likelihood
04:39 that the market is lower at the end of the year
04:41 than it is last Monday.
04:43 Now we'll see.
04:45 People who make those kinds of pronouncements
04:47 generally are rendered fools.
04:49 There's a high probability I'm rendered a fool,
04:54 but it's mathematical.
04:55 I kept four of the same stocks in here just to show folks.
05:00 The stocks that you and I talked about last week, Joel,
05:03 were block, square.
05:06 Yeah, I saw that.
05:07 You had around there.
05:08 I loved it because look at the demand
05:10 and look at the supply.
05:12 So as long as supply continues to trend down
05:15 and demand remains strong,
05:17 this is what will price do.
05:18 It will move up.
05:20 But what is happening now?
05:21 If you wanna know when to leave something, people,
05:24 if you need an exit signal, there's your exit signal.
05:27 It's not that it's extreme.
05:28 It's only 45%.
05:30 Supply is 45%.
05:31 It's almost 40%.
05:32 It's getting higher though.
05:33 But it's jumped from 32 to 45 in four trading days.
05:38 That's a big move.
05:40 And it tells us that the machines, the Citadels,
05:43 the Virtus, the GTSs, the Tower Researchers,
05:48 all the firms that assess all the tick data are going,
05:51 "Hmm, I think we're gonna start to shift short."
05:53 They know and that gives us the ability to see.
05:56 And the same condition is true with the other four.
06:01 I've got Snap in here as a good choice.
06:04 But if I look at Natera, same drill.
06:07 This was a good stock to trade,
06:09 but look what's happening to the supply-demand balance.
06:11 Same thing.
06:13 10, supply plunged.
06:15 That was a great opportunity to trade in Natera,
06:17 but now supply is trending up
06:19 and heading back toward still low.
06:21 But all those are signals that are predictive
06:25 and tell us that things are beginning to change.
06:28 And day over day in the S&P 500,
06:31 on Friday for the first time in a long time,
06:33 supply ticked up.
06:35 Now again, that's not a trend.
06:37 A day is not a trend.
06:39 Two days is not a pattern.
06:41 But now that's got my attention
06:44 because I think that there's a probability
06:46 based on those, I already knew it mathematically,
06:49 that when we get to options expirations,
06:52 A, the market's poorly hedged right now.
06:55 And I can prove it to you.
06:57 And B, the big institutional money pegged to models
07:01 is out of whack with those models
07:03 and they're gonna have to do some adjusting.
07:04 And that can destabilize the market.
07:07 Again, I'm not predicting it.
07:08 I'm just saying when there is risk,
07:10 the prudent foresee evil and hide themselves.
07:13 I like to step around those events
07:15 so I don't give up my gains.
07:16 I've had a good, I'm sure you guys have too.
07:19 The whole market has been awesome,
07:21 but you don't wanna give it all back.