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We like benchmarking the Battle of the Little Bighorn, which occurred Sunday, June 25, 1876. Thursday was the 133rd anniversary. There, the last free Native forces on the great American central plains had a final hurrah at the expense of Lt. Colonel George Armstrong Custer. We clock it each year in respect for a spirit committed to freedom at any cost and willing to fight impossible odds in its name.
This past Friday, the natives in the equity markets were restless. Before we get to that, recall how last week we wondered if a strand comprising market structure had snapped on June 19? We'd observed a uniform ripple across perhaps 25% of all volumes (based on a sample). Neither size nor industry had apparent bearing, telling us it was risk-related.
On the surface, perceived risks declined. Equity values, which had been generally falling, leveled out. The few exceptions were found among issues affected by credit risk, we saw. On the whole, reduced risks lowered the discount on equities (it didn't make them look better to buyers). Few forces to our knowledge may weigh so heavily on the whole market as to show up in virtually any issue. In fact, we think it takes a combination of major institutional investors using standardized risk-management metrics; their counterparties in the form of banks and insurers; and governments or central banks.
Think of it like an insurance policy coming due. The policy holder is older and potentially susceptible to greater risk, so after the physical, doctor and patient are relieved to find no major malady. The insurer then grants renewal of the policy for less cost than the policy holder feared. It seemed to us that whatever had furrowed the brow of the forces behind macroeconomic equity volumes reached a similar place on June 19.
Bump forward to June 26, the last day where institutions could true up portfolios before the end of the quarter and the month and know for sure that positions would settle (settlement rules are T+3 and June 26-30 is T+3). We again saw a sweeping event in executed order flow, indicating movement on a scale we'd not witnessed since last autumn.
Some would say "Russell rebalances." Too big and indiscriminate, in our opinion. But it could be the first twinge from the June 19 event. Sometimes the undoing of things is subtle, much as it was for Custer, riding confidently in command of 242 enlisted men and 16 officers on a hot midmorning in Montana, following the trace of the Little Bighorn River, which the Indians called the Greasy Grass. His biggest concern cantering Cemetery Ridge was that the Indians might escape to the north.
Long-stretch historical analogies aside, beware this: Actions tell us that money behaved last Friday as though Q3 won't be good for equities once we're past July expirations and the insurance policies come due again.
IROs, we can of course be wrong. The reason we trust market structure, however, is because it's not what somebody says, nor it is it technical analysis following trends. It's very simply what money is doing right now. Money right now took out some serious insurance on June 19 and then acted like it was the Last Stand on June 29.
We're just glad to be sitting here above the fray observing. Next week we've made note to discuss what separates market structure from other forms of analytics and why it matters so much to the IR job today.
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