“When the stock market and unemployment are both surging simultaneously, then SPX doesn’t reflect the economy.” -talking head who thinks they’ve figured the market out
Yea. No kidding. Since when was SPX ever supposed to?
Most know by now that SPX doesn’t even reflect the S&P500. SPX simply reflects in/outflows on 5 ticker symbols: MSFT, AAPL, AMZN, GOOG, FB. And these 5 stocks dominate the equity markets - in market cap size, breadth of ownership, market behavioral influence/impact and real world influence/impact - globally.
As index ETFs such as SPY, IVV and VOO continue to gain popularity and AUM at the expense of active management, combined with cap weighted rules based methodology that S&P uses for its index allocation, these passive funds have transformed the largest publicly traded stocks to essentially become glued together, such that the entire market essentially moves up/down as one singular monolith.
So, its amusing that Congress has also decided to take this same approach in their grilling of the CEOs from 4 of the big 5 (AAPL+ GOOG + AMZN + FB), together as one. And its also amusing that these companies are being grilled because they are monopolies - a group of monopolies...? I don’t doubt that there are antitrust/anticompetitive behaviors taking place, but if you’re going to hold a congressional hearing on monopoly powers, maybe don’t do it as a group.
Maybe this is the start of a trend in which the real world is now trying to reflect the passive ETF correlated market. In a way, it is - these 4 companies have been under the same “break up” regulatory hammer risk, and Congress’s “cap weighted, passive indexation hearing,” combining and correlating different and distinct matters into one, is doing exactly what passive ETFs have done: make stock picking obsolete, as they’re all going to move together as one anyway.
Look at the image, and see if you can determine which chart belongs to which SPX individual. Point is- they’re basically all the same, despite having completely different biz models and products, but you’d never know by looking at just the charts without labels and prices. And if you’ve put capital (yours or someone else’s) into a company, and you cant even distinguish which is which, then I’m not saying don’t invest, but lets finally stop pretending that poring over minuscule details of fundamental analysis actually has an impact on stock prices.
Try the exercise- see if you can label each of the 4 blank stock charts beneath SPX on top.
Done? Whatever you guessed, you’re wrong.
Here are the answers:
Yep, those are not AAPL, AMZN, FB & GOOG. They’re the sub-megaweights of SPX: Home Depot (HD), Accenture (ACN), NIKE (NKE) and salesforce (CRM)- again, businesses that have nothing to do with one another in the real world, but in the world of passive indexation (ETFs or Congress), there’s no distinction, and they all just move as one.
And here are the actual charts of SPX vs AAPL GOOG FB AMZN
That is interesting, and imo ALL of the FAAGs are bad actors. I would also lump Nike in as a bad actor and HD is certainly a China play.
With the Trump admin needing to take a bite out of FAAG prior to the election, there is great dilemna seemingly. Crashing SP500 prior to the election won't be allowed, that's for sure.
acrossthespread
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@Stone881, agree, but point isn’t saying good/bad actors, let alone good/bad investments. Just showing that the endless time and resources devoted to this industry of poring over South American seasonally adjusted margins on product X is not only a pointless waste of time energy and money, but dangerous to rely on as the reason to throw your capital behind an idea - fundamentals don’t price financial markets. Neither do technicals. Flows of capital in/out determine asset prices, and only flows of capital. Anyone who’s a one factor analyst is set up to fail. And fundamental analysts tend to be the most stubbornly rigid against this reality- understandable, because its admission of your life’s work is completely meaningless, hard pill to swallow. But I’d argue a harder pill to swallow is blindly doing research work, positioning long/short SPX heavyweights, and then having VIX cross above 32 and 500 stocks in the s&p500 simultaneously and indiscriminately sell off, and you have to face your investors and tell them you’ve lost their money, but dont even have an explanation as to why.
ericpaulmangin
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@acrossthespread, I'm pretty new and dumb, but I've been studying a lot. When you say "flows of capital", what do you mean exactly? And how is that predictable through technical analysis (i.e. what should I be studying while I'm learning here)...? tyty #following your posts btw, appreciate you
acrossthespread
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@ericpaulmangin thanks for the comment, and just FYI- we’re in completely uncharted territory, every single on of us is “new and dumb.” Flows of capital (or behavior of capital as I prefer to say) refers to an extremely basic and simple concept: movement (flows) of money (capital). Money in > out, prices ↑. Money out > in, prices ↓. How money movements behave are THE one & only factor that determines pricing for anything in a (free) market - whether its investors’ money, central bank printed money, corporate buyback money. Earnings don’t price stocks (CEO doesn’t get on the call and say “...and our stock price shall be set at $8.90 today”). Fed/FOMC doesn’t even set actual overnight rates- they set a target RANGE, because even the Fed, with $ printing powers and rate setting committee, is at the whim of the markets’ behavior as expressed through movement of money. I know it sounds insultingly obvious to say that buyers/sellers determine prices, but then look at the reality. We have an entire industry of people focused on the asset, doing all this fundamental analysis, w/ total focus placed squarely on the asset and where it “should” be priced. I don’t take that approach, I could really care less what the asset is and its textbook fundamentals. Instead, I look directly at the source of what determines market prices- the behavior of market participants and their capital.
acrossthespread
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@ericpaulmangin Where is money going into / out of, how much money is already in / on its way / remaining, who’s money is it, what would cause money to shift from asset to asset, when and for how long will the movement process take, how long will it stay there/permanence, what are the factors and triggers, what consequences if any, what are the 2nd, 3rd, 4th order effects etc.
I’m not saying things like earnings and fundamentals dont matter- they can/do if capital flows will respond to it, but not inherently. And as you can see in the charts above, it clearly doesnt even matter what the fundamental biz model is (let alone minute details on earnings)- because companies’ performance and their ticker’s market performance are not directly intertwined. “How is it possible that the market is rallying while unemployment is surging??” Um.. very simple on markets- they’re rallying because money is flowing into those markets. And wtf does that have to do with unemployment rates? Understanding behavior of capital is everything, as is misunderstanding it can destroy you. Most simple example- why did markets tank in March? No, not COVID. COVID has NEVER had a direct impact on equity markets. Markets sold off triggered by US Dem primaries/B Sanders initial surge, triggering systematic short volatility and UST basis trade unwinds. Nothing to do with COVID. Further proof- where are markets today vs March, and how is COVID situation currently vs march. “Far better” and “far worse” are the answers, COVID doesn’t/didn’t ever drive markets. Behavior of capital is driven by other forces. And nothing is “predictable” through technicals or otherwise. But charts can at least show you the previous behavior of capital relative to an asset, which is far more relevant than the fundamental “fair value” of an asset
With the Trump admin needing to take a bite out of FAAG prior to the election, there is great dilemna seemingly. Crashing SP500 prior to the election won't be allowed, that's for sure.