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This is supposed to be the hap-happiest time of the year...
Since 1950, December has either notched higher average returns or finished higher than any other calendar month. December has seen gains in 75 of the last 100 years.
But the Dow just opened down 600 points - and not for the first time this month, either. So, what happened?
Inflation worries, plenty of downside volatility, and fears of the new omicron variant coronavirus mean this particular December is a little frostier than most investors find seasonable.
The chilly atmosphere has folks worried the "Santa Claus Rally" - the historically strong performance stocks tend to enjoy during end of the year and the beginning of the new one - will pass them by... or leave a lump of coal in their stocking.
But I have plenty of reasons to be optimistic about the days and weeks ahead, and once you pick up on the recommendation I'm going to make in a second, you will, too.
There Are No Worries in This Corner of the Market
There's a lot more going right with the market than wrong. Bonds are behaving nicely, and the overall trend in stocks is up, despite volatility that we've seen.
More importantly, a big, powerful market "engine" is still going strong as ever, firing hundreds of billions of dollars at select stocks quarter after quarter.
And it's these overlooked but extremely "voluminous" inflows that are the key to this particular holiday profit play.
It's all about "buying the buyback" - the massive repurchases by companies listed on U.S. exchanges.
Companies bought back a record $234.5 billion of their own shares in the third quarter of this year. The previous record of $233 billion in share repurchases came in the fourth quarter of 2018. The second quarter of 2021 saw $199 billion worth of buybacks.
And there will be even more in 2022.
2021 is almost in the history books, and S&P 500 earnings look as though they'll end the year at close to $205 per share - a record earnings windfall that's got the momentum to boot. Profit margins are at a record high of 12.4%. And companies are generating record rivers of excess cash flows.
Hundreds of billions of dollars of all that money flowing down to bottom lines are being earmarked for share repurchases. And as companies generate even more money, especially the ones that can pass along rising prices and plump up their profit margins in the process, even more money will go toward buybacks.
Of course, buybacks reduce the number of outstanding shares against which earnings are calculated, increasing earnings per share metrics and valuation expectations.
The trading desks that execute buyback programs for companies always look for dips to buy into falling prices. That's another reason, and one that's rarely talked about, that "buy the dip" has been working so well for so long.
And it happens over and over and over again.
There's a Way to Own the Biggest Buyback Programs
In the second half of 2021 alone, we've seen Microsoft Corp. (NASDAQ: MSFT), Target Corp. (NYSE: TGT), Morgan Stanley (MYSE: MS), Qualcomm Inc. (NASDAQ: QCOM), Broadcom Inc. (NASDAQ: AVGO), and Oracle Corp. (NYSE: ORCL) announce huge buyback programs worth between $10 billion and $60 billion. As the pace of buybacks picks up, the stocks of companies buying their own shares, some at even higher prices, will keep going higher.
It's the simple physics of the stock market.
The way to play the rising tide of money going toward buybacks and rising prices of stocks benefitting from those tremendous inflows is by buying all the companies targeting their own stocks for a ride higher.
But I'm not telling you to buy them individually - I'm telling you to own them as a group, most of them, anyway, in the form of the iShares U.S. Dividend and Buyback ETF (BATS: DIVB)
DIVB not only sports a tidy 2.12% dividend yield thanks to the companies in the ETF's portfolio throwing off cash to shareholders, but it also holds companies running some of the biggest, most active buyback programs.
Buying stocks of companies that buy back their own shares that not only create support levels for themselves, but are also flush with the dry powder to buy more shares as they're driving them higher... It's a strategy that ensures you'll always be buying dips because, as I said, that's what the trading desks executing buybacks do for the stocks they're buying - the same stocks in the DIVB portfolio.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.