Ranking the Four Primary Metrics of the US Stock Market

By Todd Harrison  AUG 05, 2013 12:00 PM

The more legs you have, the more profitable you'll be.


Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Good morning and welcome back to the flickering pack. Following a stiff lift to all-time highs and a few bites of humble pie, we power up our weekly pup to find stateside stocks mixed as we power up a fresh five-session set. 

We often talk about our four primary metrics -- the "legs under the trading table" that support profitable stock transactions. As I’ve received a few inquiries about how they currently rank on the metric totem pole, I figured I would list them in order of importance.

1. Psychology: Far and away the most important metric in today’s marketplace. Between the persistent government intervention and upwards of 70% of volume generated by high-frequency trading, this is no longer our fathers' stock market. Conventional wisdom dictates the Greenspan put has morphed into the Bernanke call; there is a difference between a stock market rally and a legitimate economic recovery, which continues to manifest via the devolution of social mood.

2. Structural: The structural metric once focused on rates, credit, deficits, currencies, and the like; these days, it’s morphed into QE tapering expectations and what is setting up to be an accounting showdown between the Federal Reserve and Treasury Department. Much like FASB 157 was the catalyst for the 2008 financial crisis -- before it magically disappeared -- we can expect the intra-government agency machinations to help shape our forward path, although this may be years in the future.

3. Fundamentals: 393 of the S&P 500 (INDEXSP:.INX) companies have reported thus far this season; 55% beat revenue estimates and 73% beat earnings (the discrepancy is likely a function of cost-cutting). On average, companies are beating by 2.2% (below average). Aggregate earnings growth is 1.7% (vs .6% at the end of June). Materials, health care, and IT have the highest percentage of companies beating EPS estimates while telecom services and utilities have the lowest. For Q3, 61 companies have issues negative guidance while 16 guided higher. (Source: FactSet.)

4. Technical Analysis: Typically the third-ranked metric -- in times of confusion, traders tend to embrace this discipline -- the technical landscape remains constructive over S&P 1675. The leadership (financials and tech) is what you want to see, and we’ve seen more sector rotation than outright migration, which is constructive on the margin. Respect -- but never defer to -- the price action and remember that the last time consumer confidence was this high was in the summer of 2007, per the chart below.

Net/net and bottom line, if the tape doesn't come for sale in August, September, or October -- wide berth, I know, but I sense we’ll see it sooner than later, if it is to occur -- we could be setting ourselves up for some performance anxiety (read: a long squeeze) in November and December. In the nutty world of managing OPM (other people’s money), it’s OK to lose money if other fund managers (and the benchmark) lose more, but anathema to make money if others make more.

Random Thoughts


Twitter: @todd_harrison

Position in SPY.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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