Not All Volatility Is Created Equal

Nearly all investors, at some moment, ask the question, “why is this asset moving?” 

This is a very complicated question, and knowing the driver of the market movement is key to understanding the answer. 

Many equity investors are too focused on only company-specific news—such as earnings announcements—as drivers of price action. But in reality, most price action is driven by factors outside of company specifics, with sector forces and macro forces being the most prominent.

What is a Sector Move?

At times, it is the sector to which an individual stock belongs that is the driving force behind its movement. 

In some cases, news that is relevant to the entire industry (OPEC cutting oil supply, for example) could cause all stocks in a given sector to move. Or it may be that a large asset manager has decided to increase its exposure to all stocks in a sector, causing them to move together.

MarketReader defines a sector move as when the sector’s performance deviates significantly from what is normal historically, in relation to how the broad market is moving.

Silicon Valley Bank and the Regional Banks Sector

Silicon Valley Bank SIVB March 9

On March 9, Silicon Valley Bank (SVB Financial Group/SIVB) experienced a historic selloff of more than 60% in a single day after announcing the liquidation of more than $1B in common stock and selling approximately $21B in securities, resulting in massive losses for the company. The rest of the Regional Banks sector moved down along with SIVB. MarketReader CEO Jens Nordvig even commented on the market shift in a Bloomberg article published that day. 

The MarketReader system detected the unusual volatility immediately and highlighted news headlines, social media posts, and correlation metrics associated with the selloff as soon as it started.

Silicon Valley Bank SIVB March 9

Importantly, our system also identified that the SIVB selloff was part of a broader move in the entire Regional Banks sector. As the sector moved sharply down, MarketReader surfaced explanations in real time for not only constituent stocks like SIVB, Silvergate Capital Corp (SI), and Signature Bank (SBNY), but for ETFs with exposure to the sector, including the SPDR S&P Regional Banking ETF (KRE), pictured above. We can see that from 9:30am-9:40am ET, our system detected that the sector ETF drop of 1.5% was potentially driven by SIVB, with a correlation of 66%. 

Without the knowledge that SIVB was driving down the rest of the sector, investors with positions in other regional bank companies would not have understood why their shares were losing value by simply looking at those individual companies alone. 

What Is a Macro Move?

When the broad market is moving, many individual stocks and ETFs will tend to move also. With larger external forces at play, there is no reason to look for a company-specific explanation. The solution is instead to look at the bigger picture.  

For example, when Russia invaded Ukraine in February 2022, we saw a broad move in various markets globally. 

Another common example of a macro move is when a CPI release comes in better than expected. This can result in support across most sectors in the US stock market (although not all). So, pinpointing when you are dealing with a macro shock is important for understanding why individual stock prices are moving. 

MarketReader is able to detect macro moves by watching all US listed assets in real-time and drawing a conclusion based on how thousands of instruments are moving in relation to one another.

What Is a Micro Move?

We identify asset volatility as a “micro move” when there is no driver behind a movement aside from the specifics of a company. In other words, there is nothing happening in the broader macro space, or in the sector, that could explain the volatility of the asset. 

MarketReader defines a micro move as a move with a notable deviation from what is normal in relation to how its sector is moving.

How Can I Use This?

There are significant advantages to understanding whether the root cause of market volatility lies at the macro, sector, or micro level. 

To define which market moves fit in each category, MarketReader looks at all assets in the market at every moment throughout each day and systematically compares them against one another to determine which moves are truly unusual. One could not draw the same robust conclusions by only looking at one or a few assets on their own. 

By automatically identifying the breadth of market volatility in real-time, MarketReader saves its users massive amounts of time by immediately telling them if a move is being caused by macro or micro forces. 

With this knowledge, users can manage risk for themselves or their clients, make better-informed investment decisions, educate themselves on market dynamics, or alert others of relevant market moves before they see it in the news.

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