Corporations Set Records For Buybacks As Their Insiders Sell

2018-06-12_8-19-13

In fact, the market-cap madness is easy to visualize. A broader-based bull market would see Invesco S&P 500 Equal Weight (ETF) performing as well, if not significantly better than the S&P 500 SPDR Trust (SPY). This is not the case, though. The SPY:RSP price ratio is hitting record peaks because FAANG stocks are heavily weighted in SPY.

spy-rsp

The success of the privileged few FAANG components is even more prevalent in the NASDAQ 100 index. A broader-based NASDAQ bull would witness First Trust Equal Weight Nasdaq 100 (QQEW) performing as well, if not significantly better than Invesco NASDAQ 100 QQQ (QQQ). Instead, The QQQ:QQEW price ratio is hitting new highs on FAANG euphoria.

qqq-qqew

Does it matter if bull markets are narrow or broad-based? I think so. For instance, Wall Street’s top analysts have more than 180 buys on FAANG and a modest 7 sells. That kind of discrepancy is eerily reminiscent of the dot-com craziness in 2000.

Similarly, when I review technical charts of the Nasdaq 100, and see that the current price is 30%-plus above its yearly 5 exponential moving average (5 EMA), I wonder when the price reconnect will occur. Throughout history, price reconnects always occur.

ndx

The biggest danger may be in the notion that FAANG dominance is a good thing for indexers. After all, most ETFs are market-cap weighted, not equal weighted. It follows that investors keep winning as long as FAANG keeps on winning.

Unfortunately, neither ultra-low borrowing costs nor the one-shot tax bonanza will be able to finance these kind of buyback levels down the road. Worse yet, should there be a populist backlash against corporate greed and questionably timed insider selling, FAANG stocks (and the ETFs that overweight them) may get beaten to smithereens.

Can’t see the forest for the trees? Consider data showing that Amazon paid only 12.9% of profits to federal, state, local and foreign taxes from 2007 through 2015. According to S&P Global Market Intelligence, that’s only half what the average S&P 500 company paid in the same time frame.

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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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