What Is A Quant Bounce?

We wrote last Tuesday that a 1,000-point bounce might be on the way. We’re up 800 points since. Yes, it’s a lucky guess, but our rationale reflected what we saw in the data: institutional trading wanting to act with more aggression and less prudence.

The data don’t indicate that this run is over yet. Here are some factors to consider and kick around with your fellow executives and IR professionals that’ll help you keep your cool quotient stable: Volatility derivatives expire tomorrow, and the whole rest of monthly futures contracts lapse by Friday March 20. Since US taxpayer money has made whole many holders of counterparty swaps, having traveled from the Federal Reserve and the Treasury Department to AIG and various prime brokers ranging from Deutsche Bank to Goldman Sachs, there’s reason for pension funds to lock forward contracts and let the money stay in equities for a few more days.

But we’re almost certain gains will be locked before month- and quarter-end. Then logically, we see a return to short-term divergences and languishing equity values. Why? There are zero value drivers in the markets except the ebb and flow of institutional capital. No amount of political rhetoric and Keynesian drum-beating will alter the fact that spending and consumption are inferior to savings and investment.

So… How do these “quant bounces,” or mathematical surges, occur in the markets? It’s not as complicated as it might seem. Here’s an analogy: if you merge onto the highway in your car, you get up to highway speed less because the road permits it than because you’re fitting in with behavior around you. In other words, if institutional risk managers decide the least risky short-term vehicle is equities instead of credit instruments or commodities or currencies (this is about relative value, not absolute value), then the whole equity water level rises, regardless of fundamentals, because all the money merges at freeway speed.

In practical terms, allocations to equities are ratcheted up and money spreads via algorithms across the equity spectrum. The moment it starts to leave one place, it leaves everywhere else too, and heads out in pursuit of a different asset class with better near-term risk indicators.

This is what we’ve seen over the past week. It’s a typical example of what we describe as price-setting for risk-management reasons, rather than for rational or speculative purposes. Rational investment remains spotty. Speculation remains pretty high, frankly. The positive side is that a well-managed business buttressed by a well-crafted message can stand apart from the rest in markets like these.

Absent those blessings, you can increase your IR cool quotient by comprehending how quant bounces differ from actual institutional investment.
Tim Quast is a fifteen-year Investor Relations veteran and founder and managing director of ModernIR.com, which parses and categorizes over a half-billion shares per week with its trading intelligence systems. More information is at: ModernIR.com. For more information on market structure, please visit: What is market structure?

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