How Can You Trade Any Market? Tim Quast, Founder/CEO, ModernIR and Market Structure Edge Has The Answer

Benzinga

ModernIR is a financial technology company that uses Big Data analytics to translate complex market data into trading and investment behaviors for public companies.  ModernIR pioneered behavioral data-analytics for IR market intelligence and invented Market Structure Analytics™ for issuers and is now the largest provider of quantitative equity analytics to FUS-listed public companies.  ModernIR also launched Market Structure EDGE in 2019, quantitative analytics for buyside portfolio-shaping.

Transcript

00:00 this market doesn't really care that much

00:01 with the economy right now.

00:03 This is market is just thinking,

00:04 oh, the stock's going up, I'm buying.

00:06 So that's why we jump into, you know,

00:09 your, you know, obviously your system here, Tim,

00:12 and we look, you know,

00:13 and we like to look at the market structure.

00:14 We like to look at, you know,

00:15 what supply and demand saying here,

00:17 because it gives us a glimpse for this week.

00:19 That's why we like our Monday segment with Tim Quast,

00:21 because it gives us a glimpse into what, you know,

00:23 supply and demand is looking like.

00:25 So can we break into that?

00:27 - I'm having, oh, there it goes, it woke up.

00:28 - It's okay. - It woke up.

00:30 - A little slow, like me.

00:31 Just a little bit slow. - Yeah, don't worry.

00:32 - I'm slow too today.

00:35 Monday cobwebs.

00:36 - Yeah, it feels like late July.

00:39 So for context, if you're, you know,

00:42 what is market structure?

00:44 It's the mechanics, the rules.

00:47 Mechanics and rules that govern how the US,

00:52 you know, this is US stock market centric, how it works.

00:55 Bunch of rules govern how trades match,

00:58 how stocks get priced and quoted, that's all regulated.

01:02 So beautiful thing about that is we can build

01:04 mathematical models that look at it.

01:06 And it's not technical or fundamental.

01:09 Technical inputs and fundamental inputs

01:12 are a part of demand and supply.

01:15 So, you know, this is what I mean.

01:16 Demand right at five is low volatility.

01:20 Stocks that spend a lot of time at five

01:22 are low volatility stocks like, you know,

01:25 Philip Morris, Colgate-Palmolive, Southern Company,

01:30 just picking stuff.

01:31 When demand is at five and supply falls,

01:34 there's a probability of producing returns.

01:37 And that applies to whether you're trading low volatility,

01:40 meaning you're hitting singles, not home runs,

01:43 just want to get on base, take a little profit,

01:45 or momentum.

01:46 Momentum has really big divergences.

01:49 So this is what we look for all across the market.

01:52 Is there momentum, is there low volatility?

01:55 What is occurring in the broad market?

01:57 Broad market is much hotter right now

02:00 than the low volatility portfolio, which is at five.

02:03 5.6 if you took an average at certain points,

02:05 but right now five.

02:07 So 6.6 is the, that's the S&P 500.

02:10 Whoops, I got to reload that, sorry about that.

02:12 So if you look at broad market sentiment,

02:14 I think this is very telling.

02:16 If you back up and you look at a,

02:18 I'm going to do this for the sake of illustrating a point.

02:22 So if you look at a three-year view,

02:24 where did the market do really well?

02:26 Well, it did really well in here,

02:28 back here from November, 2018,

02:31 all the way to around September, 2021.

02:36 This is a great stretch.

02:39 What was demand like?

02:40 What was, there are no drops below the green line at all.

02:44 Very strong demand, and then come down and look at supply.

02:47 Supply was very consistently below the trend line.

02:50 When those conditions exist, stocks do well.

02:53 When stocks begin to spend more time below that green line

02:57 and supply rises above trend, they don't do well.

03:00 So what is it now?

03:01 Well, we've had the same conditions as back here.

03:04 We have very strong demand, nothing below the green line,

03:07 and insufficient supply.

03:09 That's what causes stocks to rise.

03:12 If those conditions break down,

03:14 and they tend to break down

03:16 once the demand rises above the red line,

03:19 then we have trouble.

03:20 I can't tell you right now what's gonna happen next.

03:24 It will all depend on the supply-demand equation.

03:27 That's why I'm neither bullish nor bearish.

03:29 I could look at those data and say, well, could go on.

03:32 I could also say, well, it could fall apart at any moment.

03:35 So what do you do?

03:36 - What do you do?

03:38 What do we do?

03:39 (laughing)

03:40 - Right. - Tell me what to do.

03:41 - That's what we all wanna know.

03:43 We just want a simple answer that says,

03:45 can I do something that will consistently produce returns?

03:49 Well, I'll tell you what I do.

03:50 And so I bought two positions

03:53 in the Momentum portfolio on Thursday

03:57 because there were over 20 components in it.

03:59 Right at the end of the day,

04:01 two members of that portfolio,

04:05 Twilio and Trade Desk,

04:07 were down almost all of their volatility,

04:10 how much they move every day.

04:11 Well, I can look at the supply-demand balance and say,

04:14 that's a pretty good bet.

04:16 On Friday, I was stopped out of both,

04:18 but I lifted my stops well above my entry point.

04:23 So I was assured of making money.

04:25 I didn't care if I hit my limit or my stop,

04:28 but it was telling that they stopped out.

04:31 So I made about 80 basis points on those.

04:34 That's fine.

04:35 I'm very happy with that.

04:36 And that's really what you do.

04:38 If we look at this Benzing of July 24 portfolio,

04:41 look at this, demand very steady, supply falling.

04:45 That kind of condition will produce a return

04:48 most of the time, statistically 72% of the time,

04:51 no matter what your entry point is, in one to three days,

04:55 you can produce a return of about 1%.

04:58 So that to me is what you can do in any market.

05:02 If I were to pick one of these,

05:03 I'll go up here and do it.

05:04 I would say, how about Liendel-Bazell?

05:07 Big, big lithium company.

05:08 I really don't care what they do.

05:11 I care whether, because what they do

05:14 is known by somebody else

05:16 whose opinions and actions are an input into demand.

05:20 So I don't have to know what someone else knows.

05:23 All I have to know is, do people agree?

05:25 Well, generally people agree that Liendel-Bazell

05:28 is a low volatility, steady demand stock with falling supply.

05:32 What happens in any market, pick your thing,

05:35 when there's steady demand and falling supply?

05:38 Prices rise, right?

05:40 That's always what happens.

05:42 Now it's not perfect, but that's how to look at it.

05:44 And to me, that's what you do.

05:46 That's how you can trade just about any market.

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