Liquidity Data Suggests Rebound is for Real

“Corporate investors predict the economy,” claims Biderman, adding that corporate managers have a pretty good idea when their company’s stock is under- or over-valued, and act accordingly. “When the economy bottoms, corporate America starts buying,” he says — whether it’s their own stock or that of other companies they’re trying to acquire. Thus, he’s especially encouraged by announced corporate buy-backs totaling nearly $50 billion in the four weeks through last Thursday.

While the market history of “net float” reaches back only to 1987, Biderman claims that it has correctly predicted major market turns “as far back as we have data.” One exception was the reversal in the first quarter of 2001. Although liquidity measures indicated that the market should rise in the early part of last year, the declining economy proved a more powerful engine.

Equity-fund flows, another indicator that TrimTabs monitors, also seem to point to an improving market in the months ahead. The reason: investors have been fleeing equity funds in droves since late May, and recent data suggests that outflows may be peaking.

Biderman sees fund flows as lagging indicators, “and at extremes, they’re contrary indicators,” he asserts. He notes, for example, the record inflows during the first quarter of 2000, just prior to the tech selloff. He also cites the negative fund flows for all of 1988. While investors were bailing out of equity funds throughout that year, the S&P 500 Index climbed 12%, followed by another 27% in 1989.

Biderman blames the media, where most investors get their guidance, for that scenario. “In early 2000, if you read the media, the basic wisdom was that there was no way you could lose money in the stock market — over the long term, you’ll make money. So people put $120 billion into equity funds in four months – right at the top.” Noting the record outflows of the past several weeks, Biderman believes they point to a bottom.