Economy, Stock Market

“Signals Are Still Bearish”, Trimtabs

Source: Trimtabs Research


Contrary to popular belief, the U.S. economy is not bottoming, let alone recovering. In the past three weeks, income tax withholdings plummeted 4.5% y-o-y, which is even steeper than the drop of 4.2% y-o-y in the past three months. We expect declines in withholdings to accelerate this summer because tax refund season is over, 30-year fixed mortgage rates have shot up to 5.6%, and gas prices are at or near $3 per gallon in many areas of the country.

Another bearish sign is that companies and corporate insiders are huge net sellers of shares. Since the start of May, new offerings of $98.5 billion have been 4.6 times higher than the $21.4 billion in new cash takeovers and new stock buybacks. Also, insider selling of $3.9 billion has been 6.0 times higher than the $650 million in insider buying.

We are less bearish than we would be otherwise because our demand indicators are not too bearish. The TrimTabs Demand Index, which uses 18 flow and sentiment indicators to gauge demand for shares, is neutral at 49.2. Also, retail investors have not yet joined the party on Wall Street, which is somewhat bullish from a contrarian perspective. Since the start of May, U.S. equity funds have taken in a modest $7.1 billion even as the average U.S. equity fund has gained 8.6% in price.

We want to emphasize that we make our market calls mostly based on macroeconomic data and changes in the supply of shares, not changes in the demand for shares. But we will modify our market calls somewhat based on our demand indicators.

Projecting daily float expansion and contraction in the U.S. stock market suggests corporate selling should far exceed actual corporate buying this week. New and completed cash takeovers added $100 million daily to current liquidity in the past four weeks. We estimate actual stock buybacks are $200 million daily. Therefore, actual corporate buying should total $300 million daily.

On the other side of the corporate liquidity ledger, we expect $2.0 billion daily in new offerings and $100 million daily in net insider selling this week. Therefore, corporate selling should total $2.1 billion daily, which would be $1.8 billion daily higher than actual corporate buying.

June 15, 2009
Charles Biderman,
chief executive officer, TrimTabs Investment Research