It’s now less than a week until Christmas as 2019 (and Old Ivy’s first full year of operations) quickly wind to a close. The last 2 weeks of the year are typically characterized by “thinly traded” markets with sometimes inexplicably volatile stock moves as many (but not all) large managers and retail investors perform tax planning and largely close out their books the rest of the year As liquidity and trading volumes dry up, some stocks may be vulnerable to bouts of illiquidity. And while it is not difficult to identify bizarre price action when one sees it, it is often a fool's errand to attempt to identify the catalyst for the sudden price movement and its significance. In any event, even during the holidays there are daily segments on financial television networks devoted to figuring out the precise causes for every minor flutter in securities prices.
As I speak, on a TV just a few feet away from my head, some regular talking heads on CNBC are debating the mysterious action of a few of their favorite stocks of late, what it means, and what’s therefore going to happen in the future. Oh and please remember that past performance is not a guarantee of future results. :)
RECENT CNBC CONVERSATION*
Speaker 1: “Money’s gonna come in, right? Money’s gonna go into names like blah, and blap, and blar…”
Speaker 3: “Those names are trading at attractive earnings multiples. If they put up good earnings growth, they’re going to go up..”
Speaker 2 “Are we confusing value with growth??”
Speaker 5“If you’re gonna look at IPOs…look at this particular stock (that I recently purchased)!”
Speaker 4 “I gently disagree with you! I think it could be this!”
Speaker 2 “Nothing has changed with energy!”
Speaker 4 “Everything has changed with energy!”
Speaker 3 “I think what he’s talking about is this. Wait, you gently disagree with me?...”
*Note: I paraphrased this transcript but I’d consider it 98% accurate.
I’m not sure how a rational person is supposed to find value by watching these sort of exchanges (on a daily basis), but they never seem to end (thank goodness for volume control).
Anyway, I lost interest around the time the hosts unanimously agreed that there was simply a certain “They” that was negatively impacting the stocks they were discussing. The host decried that “They are coming for” ABC and XYZ stock right now"—stocks which were zagging while the market was zigging.
What they, (the hosts, not they the nefarious others), were doing was attempting to explain the inexplicable action of certain stocks (that they probably own) during a period of thin and seasonally volatile market sessions. “They’re coming for the biotech stocks right now, They’re coming for retail, They’re coming for high beta…”
It sounds a bit conspiratorial and admittedly it kind of is. And while it is also a convenient rationalization for the underperformance of personal recommendations, I wholeheartedly agree that They do exist! They are hedge funds and hyperactive traders, never ceasing to actively and aggressively trade in and out of securities, day-in and day-out, causing extra noise & volatility (a.k.a. portfolio indigestion) that can make you want to hit the sell button. They are passive computer algorithms that indiscriminately buy and sell whole swaths and large volumes of securities according to their mandates, exacerbating the noise and often creating an illusion of significance when there is nothing to see. They are ETFs (sector ETFs, leveraged ETFs, Inverted ETFs, niche ETFs), fighting against each other, buying what others are selling in an endless rotation. They are options with weekly expiration dates adding more leverage and volatility to the mix. They are everywhere. I was even one of “Them” in a prior life (and have swum in the ocean with Them)--I know what it feels like when They come for you. Don’t take it personally, you probably just got in Their way...
I stopped daydreaming and came back to the show’s closing remarks… Paraphrasing the same hosts: “We’ve seen these 2 ETFs trade with a high correlation over a couple of recent periods. Therefore, that means that the world is buying into XYZ narrative…”
Obviously…though I didn't catch what the narrative was. Perhaps it was that a retail ETF and a shipping ETF were trading with a high degree of correlation, therefore the world is buying into a Santa Claus rally.
Recent woodturning narrative:
Thank you for helping to make Old Ivy Asset Management's first year in operations a success! Wishing you happy holidays and a fulfilling 2020! (if you would like to follow my woodturning, check out my instagram @dbockel2.
All the best,