Market Structure Map

Helping IROs understand short-term market structure to maintain long-term peace of mind.

Aug 18-22: Why Are Equity Markets So Volatile?

To preface our audacious question, let’s look back at trading last week. August 18 brought bad Fannie/Freddie credit news, the 20th marked expiration of volatility index options, and the 22nd was a quantitative up-day that pushed the Dow 250 points higher (which promptly disappeared yesterday, the 25th).

Are investors a bunch of schizophrenics wringing their hands, neglecting their medication, and waking up each day in a different mood? Maybe some are, who knows. But that’s not what drives bipolar gyrations in equity markets. As we’ve noted before here, short-term market vicissitudes are mostly the quotient of divisive trading mathematics searching out divergences (alpha).

To use an analogy, if fundamental investing is watching the weather channel, short-term trading is taking all the weather data and finding the highest and lowest two temperatures in the fastest possible time. The latter is an exercise performed over and over with minimal risk. Suppose you’re a portfolio manager now, operating in an environment of global markets, automated trading, credit uncertainty, liquidity constraint and geopolitical chaos. What would you do? Research fundamental investments bottom up and hope all the other conditions don’t work against what appears to hold potential for strong appreciation? Or hire some Ph.Ds to run calculations and programs? Which option offers better personal protection from the risk of mistakes and bad picks?

And this is why Goldman Sachs makes lots of money.

If you’re in the business media, how do you explain that stuff? You say that investors “reacted nervously to a report from UBS about potential writedowns at giant insurer AIG.” Or whatever. Sure, these items weigh in. But only lightly.

Why this reality matters to you, IROs and execs, is because accurately assessing the sentiments of investors and their reactions to news, equity research and other forms of fundamental information stems from your capacity to separate the quantitative from the rational.

Speaking of rational, we have BIG NEWS here at ModernIR! As of September, we are officially exiting California and locating global headquarters (yeah, we laughed at that too) on the business-embracing and beautiful leeward slope of the Sierras in Reno, NV. Even the fabulous weather is no longer enough to keep us golden stated. Plus it’s ten minutes to the airport, a half-hour to Tahoe and right where mountain pines and desert pastels converge. Pretty darned nice.

 

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Market Structure Map

Our weekly Market Structure Map provides unique insights — free — on trading markets, with an exclusive focus on helping investor-relations professionals keep cool in the IR chair.

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