Where are the sellers? What happened to all of those people who were worried about the trade wars? Where are those traders who believed that when the ten year Treasury gets near 3% the market must be sold? What happened to the investors who are concerned about rising inflation, especially the price of oil?
They all seem to disappear on days like today and the result is a rally of incredible proportions that takes the indices to levels not seen since the mini-correction that began at the end of January.
Let me give you two gigantic reasons why this market seems unable to quit and seems to want to go higher at every turn and then we can drill down and deal with the specifics of the day at hand.
First, investors have been conditioned to do one thing, put money in index funds as a way of saving. They don't do much individual stock picking anymore. Oh sure there will be buyers of Apple (AAPL) or Alphabet (GOOGL) or Amazon (AMZN) . Berkshire Hathaway (BRK.A) (BRK.B) stands out as a sainted name. There will be takers in tech, winners in drugs, some love for retailers. An ETF buyer of banks. A sector love of biotech. But the game has changed from when I first started stock picking almost 40 years ago. We didn't even have index funds back then. Now they are the preferred as a way of saving and I don't know if things will ever return to the way it was before these big baskets were invented.
It's been a long time since we have had a horrendous sell-off. We've been in bull market mode for ages now. That has made individuals more comfortable in index style investing and even though interest rates have gone higher, the thirst for equities is unabated despite the heights with which the market has run. Why is there so much money going into the market from individuals? I think that the strong employment situation has allowed people to save. We got a great report last week from the Federal Reserve Bank of St. Louis which showed Household Debt Service Payments as a Percentage of Disposable Personal Income. It shows you how frugal the American public has become about spending. The corollary is also true, the public has become very appreciative of saving money. I am not saying that retail is falling off a cliff. Far from it. I am saying that the profligate days of the consumer are over. That plays right into the hands of the index funds. Once again, because of the frugality the savings instincts kick in the moment someone gets a job. Plus there has been a headlong rush by institutions to lower fees for index investing with Fidelity just last week introducing two index funds without any fees at all. That's astounding and it is a catalyst for even more money coming into the market.
Yes, it is true that health care costs have gone up. It is undeniable that higher rates have quelled home ownership. But lower taxes and job growth have far more than offset the drag these negatives produce.
Then there's the other colossal reason for this rally: buybacks. In what has to be one of the more prescient pieces to hit my desk in ages, Goldman Sachs has a note entitled "The wrong $1 trillion question. It's not the size of the company but the use of the cash that matters." It's a piece that says while we all may be focused on Apple crossing the trillion dollar value, we should be more attuned to the trillion dollars in buyback authorizations to be announced this year. To quote the report: "Corporate repurchases remain the largest source of demand for shares." More salient to this moment: "August is the most popular month for buybacks, accounting for 13% of annual totals." Moreover, "tech accounts for 40% of year to date authorizations, significant potential demand remains for shares as firms complete their existing programs."
Now as someone who has authorized and executed buybacks I can tell you they can be potent aiders and abettors of any increase in prices. Now some buybacks are monstrous in size like that of Apple which bought back $20 billion in stock just this last quarter. The company used pretty much every weakness to buy. I wonder if they are in there today. Other buy backs are more desultory or episodic. Buybacks can't reach for stock. You aren't allowed to walk your stock up with a buyback. You have to stay on what's known as the bid side so you are not manipulating your company's value. That said, consider what's really happening here. You have a wave of index fund buying by savers. That moves stocks up. Then you have the buybacks following up on the index buying basically creating a floor underneath at each level just in case real sellers do come in.
What is the impact of these two trends, index fund investing and buybacks? Simple: they have created a stock shortage of epic proportions. There's just not enough big cap stocks to go around without stocks moving higher to bring out sellers.
Not only that but because the market seems chronically overvalued to most professional money managers, they typically would provide stock to sate these aggressive index buyers. But these managers are often afraid to offer stock because they won't have enough on their books to beat their own benchmark, which happens to be the S&P 500. Sure they might be good enough to only pick the best of the 500 and therefore they can own less stock. But most aren't that good and they have to stay as long as possible or be outed as underperformers, a dreaded stance given how bountiful the returns have been.
Now consider the specifics of today's rally. It's got several components that have become typical of how stocks go higher. First, we know the financials want to go higher whenever interest rates go higher. It's by rote and it doesn't distinguish among individual stocks because, again, buying is concentrated via ETFs that include the financials that are expected to have higher earnings when rates are high.
Second, we have oil up and that's a proxy for strength in the economy. It's totally nutty but oil's like a barometer and when it goes higher that means clear skies ahead.
Third, there are individual stories that hearten the bulls and bring even more money into the market. Today we got a piece of research that showed Amazon's killing it in ad revenue. We got another report that said Alphabet's self-driving division, Waymo, could be worth $175 billion. Two of the FANGs always get the juices going.
We got some good news in the industrials as Cramer fave Emerson (EMR) reported a fabled beat and raise, a nice counterpoint to all of the fear about China trade, something that ignited all of the China stocks, as I call them, including Caterpillar (CAT) and Boeing (BA) .
Then we got the quizzical set of tweets from Elon Musk about taking his company private. Look, I have no idea what this man is doing tweeting about something so important, but then again, our President uses it for distribution so why not Musk. But what you need to know is that those who disagree with everything I have written here are constantly shorting or betting against this market and stocks that seem to be overvalued, with Tesla (TSLA) being exhibit A. If Tesla's going private who knows what other stocks could rip the lungs out of the shorts.
On any given day there are negatives. We have a story about how the Peoples Republic of China might change Apple's unfettered status in the PRC as part of the trade war. We have profit-taking in PepsiCo (PEP) and Facebook (FB) after big moves. We have a disappointing quarter from Zillow (Z) .
Still though, they are not going to shake the confidence of the bulls including the indexers who put money to work and the corporate treasurers who then ratchet up the price they will pay for stock. If you have one thought I want you to take away from this, it's the idea that a stock shortage, with scared sellers and frightened shorts is taking this market higher and those factors are very difficult to defeat if you are a bear who thinks that stocks are overvalued and headed for a big fall.
(Apple, Alphabet, Amazon, Emerson, PepsiCo and Facebook are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AAPL, GOOGL, AMZN, EMR, PEP or FB? Learn more now.)