As Babak pointed out, the Smart Money Flow Index appears to be making a “divergence” with the stock market. This happened in 2018 as well, before stocks cratered. *The Smart Money Flow Index assumes that the “smart money” trades in the last hour of each session and the “dumb money” trades in the first half hour of each session. This assumption is flawed, especially due to the increasing popularity of ETFs. Nevertheless, the Smart Money Flow Index remains popular.
Last week’s chart highlighted the fact that over the last several years corporations have been the dominant buyers in the market. In a few weeks, the corporate buyback blackout period will commence. Corporations are restricted as to when they can purchase, and this restriction is based on when each corporation’s earnings are reported. This chart gives the percent of companies in a blackout period by date. The blackout period peaks toward the end of October and declines thereafter. This will be a vulnerable time for the stock market, as the largest buyers will be sidelined until earnings are over. Stay cautious!
As the second chart below shows, corporations have been the main buyer of stocks since the market low. Moreover, as the first chart shows, rather than spend corporate profits on expansion, they are spending the money mainly on dividends and buying back their own stock. Notice in the first chart how the 2018 tax cut boosted stock buybacks and dividends and not so much capex spending, as we were promised. That’s not how things were traditionally done. Used to be capex spending was double the amount spent on dividends and buybacks. What does this all mean? Corporations are not confident of future growth to boost revenues and earnings. So instead of spending on expansion they are spending money to reward shareholders via dividends and buybacks. Fewer shares outstanding obviously increases earnings per share. This also begs the question of what happens when corporate buybacks slow if they are by far the main support of the market. Our answer? Watch Out!
Despite the stock market’s high volatility sparked by worries about the domestic and global economies, Wall Street strategists are telling clients to overweight their portfolios in stocks at the highest level in seven years (see chart below from Bloomberg) as opposed to being in strong bond and cash positions. Historically, this is a contrarian indicator that investors should take defensive action. Why? When the analysts are overwhelmingly over weighted in stocks, historically the stock market underperforms.
The U.S. stock market is priced for an earnings troth and then reaccelerating of growth later this year. But it is our opinion that the growth in the number of inverted sovereign treasury yield curves around the world is painting a much gloomier picture for a longer and deeper economic and stock market downturn. The chart below shows that more than 60% of the various yield curves are inverted, the most since 2007.