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Liquidity Data Suggests Rebound is for Real

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Aug. 16, 2002 — With five straight weeks of shrinking “net float” to back him up, Charles Biderman feels comfortable predicting that the market upturn is for real this time.

“Absent some exogenous shock to the system,” — say, a bank failure, financial distress for a major trading partner, or war — Biderman proclaims that “I think we’ve bottomed.”

The basis for this optimism is a series of liquidity measures that Biderman’s company, TrimTabs Investment Research, has followed since 1987, and that he believes have a good track record for predicting significant market turns.

These measures include the cash component of corporate takeovers recently announced; the cash component of completed acquisitions; new corporate announcements of stock buy-backs; new equity offerings; insider selling, and estimates of mutual-fund flows.

By applying a formula that incorporates the first five of those data, Biderman’s firm calculates what he refers to as the trading float of shares — a measure of the change in the total value of stock that is actually in circulation. New offerings and insider selling tend to increase the float, while announced buy-backs and acquisitions tend to reduce the float, or even push it into negative territory if the volume exceeds new offerings and insider sales.

This trading float of shares, or net float, can be seen as a leading indicator of market trends — generally bullish when it is negative for more than a few weeks, and bearish when it is positive.

“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.


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