The major U.S. stock market averages pushed to fresh record highs in the past week as investors brushed aside tensions with North Korea and disruptions from two major hurricanes. Our U.S. equity demand indicators remain bullish for the short term (one to two weeks) and have turned more firmly bullish for the intermediate term (one to two months).
Fund flows are sending encouraging short-term signals. Demand for U.S. equity ETFs remains weak, which is positive from a contrarian perspective. These funds issued a modest $2.8 billion (0.2 percent of assets) in the past week, and the trailing one-month inflow of $11.9 billion (0.7 percent of assets) is below the one-year average. The TrimTabs U.S. Equity ETF Index (TTEI), which uses ETF flows for short-term market timing, rose to 57.3 on September 14 from 53.6 the week before. Since the TTEI is between 50 and 75, the TTEI Model Portfolio is 75 percent long the S&P 500.
Even more auspicious is that day traders keep piling on bearish bets. They pumped 2.3 percent of assets into leveraged short ETFs in the past week, the fourth consecutive weekly inflow, while leveraged long ETFs shed 0.8 percent of assets, their third consecutive weekly outflow.
The only real cautionary short-term signal is that sentiment remains upbeat. Most major sentiment surveys indicate that the bullish camp is crowded, the VIX dropped back to a two-week low of 10.2, and the equity put/call ratio was below 0.7 on all but three trading days in the past month.
The intermediate-term outlook has turned more firmly bullish. The TrimTabs Demand Index (TTDI), which uses regression analysis of fund flow and sentiment variables for intermediate-term timing, climbed to a 10-week high of 64.8 on September 13 before ending the week at 64.5 on September 14 (readings above 50 are bullish). Since the TTDI is between 50 and 75, the TTDI Model Portfolio is 100 percent long the S&P 500.
Supply (Corporate Actions)
U.S. companies are taking advantage of record stock prices to unload more new shares. New equity offerings ramped up quickly after Labor Day, totaling $11.8 billion in the past two weeks, and eight IPOs are scheduled to come to market this week. If new offerings accelerate further to $2+ billion daily, the market is likely to have a much tougher time moving higher.
On the other side of the corporate liquidity ledger, corporate buying has slowed dramatically. New stock buybacks have totaled a scant $3.5 billion in September after falling to $18 billion in July and $28.5 billion in August. This quarter’s volume of $49.9 billion is set to be the lowest in eight years, which is a cautionary longer-term signal because buyback volume and the S&P 500 have a fairly high positive correlation.
Macroeconomic Trends
Real-time tax data suggests U.S. economic growth has cooled off into early September, perhaps due to the impact of the recent hurricanes. The income and employment taxes withheld from the paychecks of all salaried U.S. workers increased 3.3 percent y-o-y in the past three weeks and four days, below the 3.6 percent y-o-y in July and the 4.0 percent y-o-y in August.
The economic outlook has become less bright, although we do not see a recession on the horizon. The TrimTabs Macroeconomic Index, a correlation-weighted composite index of leading macroeconomic variables, sank 1.5% in the past three weeks after hitting a record high in late August. Also, key credit indicators continue to point to slower growth. The Treasury yield curve has flattened this year, and growth in commercial and industrial loans is near a 6 1⁄2-year low.
David Santschi is the CEO of TrimTabs, an Informa Financial Intelligence company.
