Just As Stocks Dropped Below A Critical Support Last Week, Banks Unleashed Record Buybacks

Tyler Durden's Photo
by Tyler Durden
Wednesday, Aug 25, 2021 - 02:29 PM

For much of the past year, tech companies were the biggest source of stock repurchases while most other companies and sectors refrained from buying back their shares.

This was due to the public shaming of airlines which repurchased tens of billions in stocks heading into the covid crash, only to demand a bailout and leading to widespread public and political condemnation of buybacks. However, as stocks doubled from the March 2020 lows and hit now daily new all time highs in stocks, all is forgiven, and every other sector is now also rushing into the "get rich quick for management" scheme that are stock buybacks, especially financials now that the Fed has greenlit buybacks by banks.

According to Bank of America, buybacks by corporate clients accelerated from the prior week to the highest level since mid-March, driven by Financials. As BofA's Jill Carey Hall writes in her latest Equity Client Flow Trends note, financials has now overtaken Tech as the sector with the largest dollar amount buybacks so far this year:

What she noted next will come to no surprise to anyone except those gullible (or mendacious) idiots who defend buybacks, ridiculously claiming they aren't the main reason for stock upside: "based on our flows data from 2010 to today, we have found that the S&P 500 sector buying back the largest dollar amount in a given week have tended to outperform over the next several months (cover chart) with a >50% hit rate."

Why does this matter?

Recall that SpotGamma, Nomura and Morgan Stanley all warned that the S&P was on the verge of a very painful drawdown, and that if last week's sharp market drop extended into Thursday and Friday, and if stocks dipped below the key 4,350 support level, a liquidation wave would quickly pull the S&P to 4,100 or lower.

However that did not happen, preventing what could have been a very painful wipeout, as if some magical force lifted stocks higher on Thursday just as they were set to drop below they key critical.

We now know what that "force" was: according to Bank of America, just as the S&P was about to drop the abovementioned critical gamma level, "Financials’ weekly buybacks were the largest on record since 2010 (and near-record as a percent of market cap)."

And while buybacks saved the market on Friday, they have also done miracles in all of 2021 because as BofA adds, "YTD, trends are already the second highest level on record (since 2010) after 2019’s record, which was 16% higher than today’s."

One final point - with YTD corporate buybacks across sectors running at +49% y/y, they remain far from pre-COVID levels: down 14% vs. 2019 at this time, and one of the weakest years post-crisis so far when normalized by market cap.

In other words, expect many more buyback-driven ramps every time stocks are about to dip below a key support level, as the banks do everything and anything to avoid a gamma wipeout.