Buybacks, Margin Debt And Digging Beyond Superficial Headlines

Let’s keep this short, but sweet and hopefully the market will perform in kind today. Yesterday was quite the roller coaster ride as the Dow opened sharply lower by roughly 200 points, carrying its peer indices lower. But as the day progressed, the market achieved the most probable outcome, which would be to finish in the green. As Finom Group outlined in a previous article titled Tariffs May Set Off Fireworks In a Holiday Shortened Trading Week, the stock market has finished higher 72% of the time on the first trading day of July.

Despite the early session losses, the market came roaring back and lived up to its historic performance. All 3 major indices finished higher on the day, led by the Nasdaq’s outperformance. The VIX also had a nice peak to trough day with the sentiment index rising sharply above 17.5% in the morning and falling to 15.6% to finish the day.

A lot has been made of fund flows lately and since the vast majority of those flows have found capital leaving the equity markets. For the Q2 2018 period, June brought global net equity outflows to $20.2 billion, the worst performance since the third quarter of 2016, just before the presidential election. The selling was particularly felt in mutual funds, which saw $52.9 billion in outflows during the quarter and are typically more the purview of the retail side.

We all know the reason for outflows in the market as of late and they largely point to a slow down or disconnect in global growth, inflation fears even as they are not necessarily realized and of course the heightened trade rhetoric. But here’s something interesting to note about the data and how it’s being reviewed. The following is from a recent CNBC article:

“Stocks right now are hanging by a thread, boosted by a bonanza of corporate buying unrivaled in market history and held back by a burst in investor selling that also has set a new record.”

The quote is from an article titled Companies buying back their own shares is the only thing keeping the stock market afloat right now. Talk about a headline, right! Well, now look at the following chart by Steve St. Angelo:

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