Good News and Bad News in US Stocks

Quant traders, I’ve got good news and bad news. Which would you like first?

Let’s take the good news. Quantitatively, there are widespread Demand/Supply divergences. Market Structure EDGE uses mathematical models predicated on the rules and mechanics of Regulation National Market System in US equities to offer a long/short strategy. We trade Demand/Supply imbalances. When Demand and Supply move in opposite directions, that’s Divergence.

The opposite is also true. Demand and Supply converging? Time to shift short (we note only the statistical probability, and past performance is no guarantee of future outcomes).

On Friday June 6, Supply fell materially for the first time since early May. By “materially,” I mean from 54.1% to 53.8%, better than a half-percent decline. Demand is still below 5.0 but it’s rising. Again, the aim is to buy rising Demand and falling Supply, and short the opposite (5.0 is the fulcrum, and stocks tend to do better above 5.0, worse below it).

There are currently 25 choices in our Daily Trading Ideas (to see them, sign up for Market Structure EDGE), a statistically fair number (over 30 is better). The probability of producing predictable returns in those equities averages over 80%.

For more on that, join the free live Discussion this Thursday June 12 at 2:30p ET.

And across the EDGE Dashboard tracking the eleven market sectors and Big Tech, plus the Momentum and Low Volatility portfolios (and whatever portfolio you want to create), small divergences abound. Most parts of the market show separation between Demand and Supply, a bullish quantitative signal.

What’s not to love? Well, a day isn’t a pattern. The move is small. And Short Volume, our measure for the Supply side of the equation, is over 53% of all volume. It’s not Short Interest, which is a 1974 measure that’s all but irrelevant in our high-speed, electronic, algorithmic stock market. Short Volume is the data set arising from Reg SHO Rule 201, the Modified Uptick Rule, implemented in 2011. It’s contemporary data.

All volume save for tiny exemptions is long or short. TSLA, for instance, is 52.5% short, meaning that if it averages about 120 million shares per day, 63 million shares are short, borrowed, created. You see, big brokers offering to buy and sell shares from others can “create” stock through exemptions to short-locate rules, so long as the books are squared over the next month.

Shorting that facilitates trading isn’t necessarily negative. Stocks can rise for long periods on artificial liquidity just as one can spend on credit cards for extended periods and give the impression of wealth. But sooner or later, you tap out your credit lines and you must shift from spending to paying down debt.

Same in the stock market. Record levels of Short Volume – all-time highs – have prevailed since May 1. Is a reckoning coming? We’ll see!

But that’s not the bad news. Qualitatively, the market has several large contradictions. Take the US dollar. A weaker one is good for stocks – and has been. But how is it that much of the world including Europe is cutting interest rates while the US is not, and the dollar falls? That’s illogical. Divergent currency policy should strengthen the dollar. Gresham’s Law – money should spend devalued currencies and buy stable ones.

Another contradiction: Why would the market shoot higher on a May jobs number in the USA that was statistically in line and materially weak? In fact, the Household data in last week’s Bureau of Labor Statistics Report shows the number of people employed declined by nearly 700,000. The market takes the Establishment survey’s 139,000 increase – but in homes across the fruited plain, the data show the ranks of the jobless rising.

Finally, it’s unrealistic to suppose that a fundamental revamping of the USA’s trade relations with the world won’t have two shoes, a step back and a step forward. The market is ignoring it – because it’s quantitative.

So we have a market that looks good but seems to shimmer like a mirage. As long and as durable as the recovery from April lows has proved, there’s a chimerical, mercurial element here. Quant traders: Buyer beware.