Buybacks Jump To Record Offsetting Selling By Retail Investors

According to the latest report on equity flow trends from Bank of America Merrill Lynch, while investors of all types are shunning equities, companies are stepping in to absorb the excess demand with stock buybacks, offsetting concerns that a lack of demand from investors for equities could lead to a substantial correction in the next few weeks.

Record Number Of Retail Closures In 2017

Last weekend, JP Morgan analyst Nikolaos Panigirtzoglou issued a research report, in which he claimed that due to the recent equity market volatility, retail investors were no longer prepared to ‘buy the dip,’ an important part of analysts’ bull thesis for equities this year.

JP Morgan: Retail Investors Are No Longer Buying The Dip

Retail investors had been expected to step in as institutional investors and CTAs “appear to be unwilling to become the marginal buyer in a backdrop of elevated volatility, a deterioration in market liquidity (see section below) and signs of the strong growth momentum over the past 6 months having peaked given recent disappointing economic releases.” As well as dip buying, a record amount of buyback activity is also predicted to support the market, but Panigirtzoglou warned that this might take longer to materialize than expected, opening the door to a substantial correction as retail investors vanish and institutions continue to sell.

GAAP Net Income Growth Has Little Impact On Returns

Bank of America’s latest Client Flow Trends report shows that, for the time being, this doomsday scenario is not yet unfolding. According to the report, the bank’s clients (retail, hedge funds, institutions, and corporations) were net sellers of US equities for the first time in four weeks last week to the tune of $0.7 billion. As usual, the selling was mainly concentrated in single stocks, while investors continued to buy ETFs. Total retail flows were $34 million, or -$5.5 billion excluding ETF buying. Institutional investors sold a total of $9.1 billion, and hedge funds dumped nearly $1 billion of single stocks.

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However, it turns out that Panigirtzoglou’s prediction that buybacks would not absorb the selling was premature. Bank of America’s data shows that buybacks by corporate clients accelerated to the highest level since late 2017 absorbing all selling by other client classes virtually. Corporates acquired a total of $9.5 billion in stock for the week. This is the 9th highest total in history with the Healthcare sector leading the charge, and year-to-date buyback activity is up 53% year-on-year.

On a sector basis, the bank’s clients bought Tech, Industrials, and Real Estate stocks, with flows into all three sectors near record levels. Tech and Industrials have the longest buying streaks (past four weeks), while Telecom, Materials, and Energy have seen three straight weeks of sales. Based on less-volatile rolling four-week average flows, sentiment has been most persistently bearish in Energy (net sales since Sept. 2017).

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