Aloha from Hawi, Hawaii. I am Charles Biderman.
My analysis of current supply and demand data suggests U.S. stock prices are likely to keep rising over the near term, which I define as the next one to two weeks.
Supply data — companies buying and selling their own shares — is mostly bullish. As Memorial Day approaches, share selling through initial public offerings and follow-on offerings usually slows as underwriters head out on vacation. However, new offerings usually surge again in late June before the summer doldrums.
One supply development that isn't bullish is insider trading. Corporate insiders have already sold almost $10 billion in May, putting this month’s volume on track to top the six-year highs in February and March. While insiders are always net sellers, the ratio and dollar amount of insider selling versus buying suggests insiders are not too upbeat about the prospects for their companies’ shares. Historically, surging insider selling has often been a forerunner of lower stock prices, but not always.
While supply data is mostly bullish, demand signals are also pretty encouraging. U.S. equity exchange-traded funds have had three consecutive weekly outflows, and stock prices tend to perform well after extended periods of selling. We have tracked the relationship between U.S. equity ETF flows and the U.S. stock market performance; Historically, it has been profitable to fade individuals’ actions. In other words, when U.S. equity ETF’s have significant outflows, the market tends to go up. Conversely, huge equity ETF inflows often happen at interim market tops.
The U.S. economy is still stronger than I would have ever believed earlier this year. The TrimTabs Macroeconomic Index just made a new all-time high, and U.S. Treasury tax data indicates wages and salaries are rising at a pretty brisk pace.
I’m surprised that our key indicators are showing such strength. The automobile industry looks as if it’s starting a major secular downturn. Used car prices — always the best leading indicator of new car sales — have been plunging. Also, the housing market looks extremely toppy. Both purchase and rental prices in major markets such as Miami, New York City and San Francisco are softening. These trends in autos and housing have to hurt the overall economy.
Given the mostly bullish short-term signals from our key indicators — supply, demand and macroeconomic — I expect U.S. stock prices to continue higher over the near term. Longer term, with looming weakness in autos and housing, and with Donald Trump leading the Gang That Can’t Shoot Straight, a black swan event could happen anytime.
Charles Biderman is founder of Informa TrimTabs, an Informa Financial Intelligence business.