What is driving up the SP500?

Manage
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This is a new thread, based on Judgetrade’s original question of what is going on with the R2000 index.

See deck:
https://docs.google.com/presentation/d/121dk2WzYgWdlpQe1NbDRCf8u0tttl5z7OeJgFJwhMR8/pub?start=false&loop=false&delayms=3000

I would love any thoughts on how this process of ‘margin dollars’ driving up the SP is working. And numbers to support a theory. What exactly is driving up prices? Any data driven theories?

Is all this margin impact coming on the derivatives and future side with index futures and options? I assume it is. Anyone have a good source for historical volume data on these? Or charts to show if volume is spiking? And/or greater on up than down days?

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Tom, our BCIp recession indicator is at 100. There has never been a major market decline when BCIp was at 100. We post this indicator at dshort.com every Thursday. Here is the link to last Thursday’s update. http://www.advisorperspectives.com/dshort/guest/Vrba-140925-Weekly-Recession-Indicator.php

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Tom - a lot has to do with the carry trade.

http://www.forbes.com/sites/investor/2014/09/04/carry-trade-the-multi-trillion-dollar-hidden-market/

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It is normal for large cap growth to lead at the last stage(s) of a bull market.

Theory: When there are no tremendous bargains to be found among small caps (which takes place after a few quarters without a market correction) then money goes to large caps because a good company at a fair price is better than a fair company at a fair price.

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…and the Fed put.

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@Chipper & Aurelian & Steve,

Thanks for playing…given your opinions are you surprised that volume isn’t rising in SP500 with the price rise? Volume is falling (albeit back to fairly normal historical levels). If money’s shifting from small caps into large caps…or being are taking big bets based on the ‘fed put’'or there is huge leverage being employed in the carry trade and the profits are going into the stock market driving up prices, how are they going in? Volume is falling.

The ‘Fed Put’ could likely be seen in the 2009 to 2012 time frame with a huge spike in volume that gradually started falling back to more normal rates. It’s not being seen any longer.

@Geov. I am not suggesting anyone make tactical allocations based on this. I am just playing around with the new charts. They’re fun. I am not suggesting that a recession is imminent. I am presenting earnings, growth and volume numbers and seeing if people have opinions particularly on these. They seem to point (to me at least) to an overvalued market. I’d be interested to hear opinions that say otherwise? I think fundamentals are very poor timing indicator. The market can stay overvalued and get more so for years. I am just presenting some charts.

I am still mostly very long. I am just asking you and others…volume is falling…there is clearly huge leverage in the system. That money isn’t really going into stocks. Where’s it going? Steve pointed to an article that says it’s going into long-treasuries. I would love some charts on long-term treasury volume to support that. ETF volume has really spiked in TLT…but ETF’s have also matured, so futures data would likely be better here. I don’t know a good source for long-term historical volume charts on these futures. Anyone?

Steve’s article concludes:
“Conclusion: The carry trade causes a rising U.S. dollar, rising U.S. bond prices, rising U.S. stocks, and deflation in commodity prices. Of course, an unwinding of the carry trade will cause the opposite.”

Institutions and hedge funds aren’t ‘pouring into stocks.’ If they were, then…why is volume falling? I am also fairly skeptical that over the past 12 months people have been increasing bets on long treasuries (even if forbes writes that), but at least it’s a theory. I don’t have the charts one way or the other here.

But, I also know that nearly all major futures traders that this article claims are doing ‘great’ with this trade are doing very poorly.

Winton capital’s averaged about 4%/yr returns since 2009. QIM is down over this time. Indexes are very mediocre. These firms aren’t ‘doing great’ and I doubt they are driving up their leverage to bet on LT US bonds.

I’ve also heard companies are buying back shares at greater rates. They aren’t. Not based on P123 numbers. I added a series on this.

I have looked up volume on ES, futures contract. Volume is below where it’s been historically. Not up. So…again…Volume’s not rising and up-down ratio isn’t changing…and companies aren’t buying back more shares.

Anyway…just playing with charts and curious to see any ‘cool charts’ from other sources.

So…where’s all this leverage investing right now?

Best,
Tom

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And the large amount of foreign money flowing into the US stock market. That is not reflected in any of Tom’s charts.

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In a vault somewhere? M2 velocity is at an all-time low…

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Hello Tom I know your question is what is driving the S&P and based on the feedback we want to know if the risk of being in the market is to high but since none of the marketing time indicators we use have any warning signals I would be interested in knowing peoples thoughts on the following which I feel is related to your question:
• From 1988-2000 the S&P 500 gained over 500%. (12years)
• From 2009 till present the S&P has gained about 130% (5years)
Is it possible that we are only half way thru an extended bull market or does everyone feel a major correction will happen?
I know this is almost like fortune telling and the best thing to do is listen to our market timing indicators but I would be interested in everyone’s opinion.
Is the current market and returns to good to be true?
Thanks Tom for asking this question.
Regards,
Mark V.

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Aurelian,

People wouldn’t borrow margin dollars and then put it in a vault. Margin dollars is at an all-time high in real dollar levels. Where’s the ‘borrowed’ money being invested?

@Mark V.
I have no idea. Yes, it’s possible we’re only half way into major bull. Yes, it’s possible market will correct in big way. I don’t think the current market fundamentals support the current price and economic growth levels. But, I think the market could still go 50% higher before a peak (even with no new major innovations or macro economic changes), or it could peak tomorrow. Too many variables to only (or primarily) use fundamentals in market timing. It’s more about mass psychology. I do think that VIX has to rise. But, I’ve thought that for a few years. Long volatility programs have had a very hard 5 years. Even global issues (Russia and Ukraine) haven’t moved it all that much in historical terms.

Best,
Tom

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Tom

  • have you considered the role of leveraged ETFs in the last few years, and how they might contribute to the real margin debt? There are many instruments involved including long and short options, different futures contract months, etc. ES is mini-futures, what about the regular S&P 500 contracts? and which months is the ES graph looking at?
  • your NYSE margin graph pertains to the NYSE but the other graphs specifically relate to the S&P 500. Is it possible that stocks outside the S&P 500 are being shorted?
  • the short interest graph is relative to the % float. Is the % float increasing over time? i.e. compaines like Facebook coming onto the market and insider restricted trading expiry.
  • is high volume a requirement for a rising stock market?
  • have you looked at COT reports to see what the commercial traders are doing?

Steve

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Have you checked the options market? CBOE volume aren’t down.

edit: their historical data is on their website.

edit2: I would absolutely borrow money to purchase physical gold if I could borrow without my personal assets being liable for it.

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Aurelian,

Options volume does appear to actually be very, very high. See:
http://www.bloomberg.com/news/2014-09-11/s-p-500-short-term-contracts-see-trading-volume-jump.html

My bet is that people are much more actively hedging positions with options and futures and this is where most of the margin money is going…active ‘tactical bets’ and risk management with derivatives.

This points up one of the problems with using stock only technical data on trading systems for mid and large cap stocks where futures and derivatives are plentiful. A large portion of the meaningful technical data (i.e. volume on derivatives, momentum and vol. on derivatives, etc)…isn’t being captured in the stock only data we’re using on P123.

As far as your willingness to borrow money and buy gold. To each his own. If your conviction is high enough, you can use futures and borrow several tons.

As far as not wanting personal liability…I’d buy as much of every positive return asset class as I could if there was no liability. But…that’s not the real world.

Best,
Tom

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Why does lower volume have to mean that less money is coming in? It is estimated that high frequency traders (HFTs) account for a large percentage of volume. HFTs are making less and less as they compete amongst themselves and remove the inefficiencies. It is also possible that the negative publicity that HFTs have gotten recently has put pressure on the regulators to reduce the revenues of HFTs. Perhaps a nice chunk of the market’s volume decrease is due to HFTs. Another big segment of volume probably comes from day traders. Day traders love volatility which there hasn’t been much of lately. That may also explain some of the reduced volume.

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Chipper,

Good points. I see estimates that hi-frequency trading are 50-60% of daily trading volume.
For example:
http://dealbook.nytimes.com/2014/07/07/no-need-to-demonize-high-frequency-trading/?_php=true&_type=blogs&_r=0

In terms of hi-frequency traders, if this guy is correct
(http://www.investopedia.com/articles/active-trading/053010/top-stocks-high-frequency-traders-hfts-pick.asp)

In that they like low-vol stocks…then, if I run an average volume screen on SP500 and SP400 stocks with Beta>1.5, should give me an indication of volume changes in the universe not influenced by hi-frequency traders. I see the same volume drop-offs (slightly larger actually).

Now seeing the lowest volume on these since Jan, 2000.

Here’s an interesting article suggesting that most of this ‘missing’ volume has moved to the options markets:
http://www.businessinsider.com/goldman-where-the-sp-500-trading-volume-went-2013-2

It’s one reason having the put-call index data series available would be a cool addition (potentially) to P123.

Best,
Tom