Corporations Set Records For Buybacks As Their Insiders Sell

Tax-cut infused earnings have been solid. The rapid-fire rise of longer-term borrowing costs has slowed considerably. And corporate share buybacks have dwarfed earlier records.

In Q2 alone, corporations purchased a staggering $436.6 billion in stock buybacks. That brings the year-to-date total to $670 billion. Similarly, announced S&P 500 buybacks are practically leaping off of the chart.

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More than most factors influencing market direction, buybacks have kept large-cap stocks from succumbing to legitimate concerns about Federal Reserve policy error, China trade tensions or valuation extremes. Buyback activity improves earnings per share (EPS) comparisons since there are fewer shares in existence. Moreover, the investment community is ultimately vying for a reduced supply of available stock.

There is some irony in the buyback phenomenon. The practice appeared as though it might roll over as rising rates would make it difficult for corporations to continue borrowing in the debt markets to finance stock acquisitions.

Then came the corporate tax cuts. And companies realized they’d need to do something will the extra cash. For the most part, the extra cash is going directly into stock repurchasing programs.

However, investment researchers at TrimTabs recently discovered a trend that is not necessarily sitting well with market watchers. In particular, executive insiders have been selling their stock at an exceptionally fast pace.

For example, TrimTabs determined that corporate insiders unloaded $8.4 billion in stock shares in May and $9.2 billion in June. It represented the largest two-month share dump in a year.

In June alone, insiders sold $8 in stock for every $1 that they purchased. Along those lines, there has been a noteworthy spike in the Insider Transactions Ratio. Readings above 20 are supposed to be near-term bearish for equities. The most recent reading? 58.

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Truth be told, the Insiders Transactions Ratio has had limited success as a sentiment indicator. Indeed, executive insiders themselves do not have an incredible track record at timing the buying and selling of their own stock.

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Disclosure: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered ...

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