Someone Isn't "Buying" This Rally: The "Smart Money" Sells For Five Consecutive Weeks As Buybacks Soar

Many are trying to put their finger on what has precipitated today's breakout rally.

On one hand you have Reuters, saying that it is due to economic data which was so poor it "spurred stimulus hopes"...

 

... on the other you have, well, Reuters again which said the data was so strong it "points to economic recovery"...

 

... and then you have the sober voices who say it was all Gartman's doing, who as we reported today, after flopping bullish on Friday, flipped back to bearish overnight as we noted first thing this morning in a warning to the bears in "Today's Rally Explained: Gartman Is Again "Selling The Markets Short" Just Two Days After Turning Bullish."

But no matter what unleashed today's algo buying spree, one thing is clear: someone has to be buying and someone has to be selling into what, Investech yesterday explained, is the latest bear market rally.

Thanks to Bank of America we know the answer to both.

It turns out that the three groups that make up the so-called smart money, hedge funds, BofA's institutional clients as well its private clients, have been selling aggressively every week. In fact, as BofA's Jill Hall explains, "last week, during which the S&P 500 climbed 1.6%, BofAML clients were net sellers of US stocks for the fifth consecutive week, in the amount of $1.5bn. This was the biggest weekly outflow since mid-December.

Hedge funds, institutional clients, and private clients alike were net sellers last week, led by hedge funds. All three groups are also now net sellers on a cumulative basis year-to-date (again, led by hedge funds). Net sales were chiefly in large caps last week, though small caps also saw outflows. Mid-caps have seen inflows for ten of the last twelve weeks, and as we recently noted, have seen the most consistent buying by our clients over the last several years despite being crowded and expensive.

This is summarized in the charts below:

 

Ok, we know the sellers. So who were the buyers? The answer is well-known:

Buybacks by our corporate clients accelerated last week, and year-to-date are tracking above levels we saw over the same period last year. The four-week average trend for buybacks by corporate clients suggests a pick-up in overall buybacks in 4Q relative to 3Q. Buybacks have been picking up again in 2016 (Chart 24)

In other words, buybacks are on pace to surpass buyback records, and since the debt issuance pipeline has to be unclogged or else risk the failure of hundreds of billions in bond bond refinancings in the coming months not to mention the collapse of the bond-buyback pathway, companies have scrambled to put a "risk on" mood on the market by repurchasing their stock, so that these same companies can issue more debt, so that they can buyback even more debt in the future.