JPMorgan Explains What Causes The Market's 3:30pm Ramp
While over the past several years many have observed the peculiar last half-hour ramp in the stock market, leading to a variety of amusing knock-off phenomena, perhaps nowhere was it more noticeable than what happened on the last two Friday afternoons, and especially the most recent one when with the market down notably going into the last 30 minutes of trading, the Dow soared in the last minute, turning green with 7 seconds of trading left, continuing the streak of 11 consecutive all time highs, the longest such stretch since early 1987.
While traditionally the “serious” media has ignored this odd last hour/minute/second ramp, on Friday even Bloomberg was compelled to chime in.
It isn’t over till it’s over. Especially on Friday. For the second time in two weeks, a final-hour ramp in the S&P 500 turned the index green for bulls, with the benchmark equity gauge jumping 6 points in a little over 30 minutes to close with a 0.1 percent advance and help preserve a fifth straight weekly gain. A similar spike salvaged gains seven days earlier.
“The machines kicked in and brought all the averages positive at the close,” Andrew Brenner, head of international fixed income for National Alliance Capital Markets, wrote in a note to clients. “We think markets move big time next week off the Trump speech Tuesday.”
After the financial crisis, traders were afraid of bad news coming out over the weekend. Now it’s the other way around, according to Chad Morganlander, a money manager at Stifel, Nicolaus & Co. in Florham Park, New Jersey.
Maybe it was the machines, maybe it was hedge funds covering (although as we reported earlier, they have actually been selling to retail investors in recent weeks), maybe it was a last minute tap on the shoulder by a certain central bank’s trading team.
However, what is known is that these farcial moves, which are draining what little confidence in a “fair and efficient market” remains, have attracted the attention of none other than the best quants at JPMorgan.
Earlier today, we showed how, according to JPMorgan (and BofA), the recent market levitation has been entirely on the shoulders of “animal spirited” retail investors plowing money into ETFs, coupled with CTA’s forced to cover into a gamma squeeze, even as hedge funds and institutions have been selling to retail investors. Well, as it turns out, the mechanics behind the recent move higher also explain such observations as Friday’s last second levitation.
As JPM’s Nikolaos Panigirtzoglou explains, “the picture we get is of institutional investors either lowering their equity exposure YTD or keeping it unchanged. This apparent unwillingness by institutional investors to raise their equity exposures YTD reinforces the argument that it is retail rather than institutional investors that most likely drove this year’s strong inflows into equity ETFs and as a result this year’s equity rally. And the fact that retail investors use passive rather than active funds to express their bullish equity views has important implications.”
The main implication is that this shift towards passive funds is elevating the importance of retail investors in driving markets. And retail investors’ sentiment is transmitted to markets more quickly via passive funds. This is because these passive funds have to rebalance by the end of the day, different to active funds that have the discretion to wait before they deploy their cash balances.
In turn, JPM adds, this end of day rebalancing means that equity trading becomes even more concentrated at the end of the day as passive funds grow. Passive funds typically rebalance at the end of the day because transacting at the closing price better aligns the performance of passive funds to the performance of the index they track.
And this end of day trading concentration is reinforced by the secular reduction in market depth and liquidity since the Lehman crisis. As market depth declines, the execution of large trades is postponed until the end of the day when more trading takes place, reinforcing the end of day trading shift induced by the expansion of passive funds. To get a sense of the underlying market transformation, YTD 37% of the NYSE trading volume took place during the last 30 mins of trading.
So the next time someone points a finger at the market’s last 30 minute levitation, one very likely culprit is the retail investor whose choice of ETFs as a “long-instrument”, leads to such ramps in the market as those shown above. It also means that as per the parallel JPM analysis, the institutional money continues to sell to the ultimate bagholder: Joe Sixpack.
As a side note, any time institutions start dumping to retail, whether with last minute ramps or not, the market’s inflection point has always been just around the corner. We see no reason why this time should be any different.