Charles Biderman, Going with the Flow

A reader suggested that we evaluate the stock market forecasts of Charles Biderman, founder and CEO of TrimTabs Investment Research. The TrimTabs perspective “relies on the insight that price [of equities in aggregate] is a function of supply and demand and has nothing to do with value.” The predictions/recommendations evaluated here extend as far back as January 2000 and come from columns in Forbes.com, MarketWatch, CNN/Money and TheStreet.com. The table below quotes forecast highlights from the cited source and shows the performance of the S&P 500 Index over various numbers of trading days after the publication date for each item. Grading takes into account more detailed market behavior when appropriate. Red plus (minus) signs to the right of specific forecasts indicate those graded right (wrong) based on subsequent market behavior, while red zeros denote any complex forecasts graded both right and wrong. We conclude that:

• Charles Biderman relies mostly on TrimTabs liquidity theory (net change in equity trading float) in explaining his forecasts. Because TrimTabs measures trading float frequently, we assume his forecasts are relatively short-term (a week to a month) unless otherwise stated.
• Many articles citing Mr. Biderman state money flow data without any forecasts. We make no assumptions about the implications of money flow and instead select only items with forward-looking comments. There are some significant gaps in media reports of his outlook. We avoid citing two forecasts within one week of each other, assuming they are essentially the same forecast.
• Charles Biderman was quite negative on equities in late 2003 and early 2004, warning of another bubble about to burst.
• Charles Biderman’s forecast sample is small, so confidence in the measurement of his accuracy is low.

The long-term data presented by TrimTabs in support of their liquidity theory, as recast on the following scatter plot, offer some indication of its forecasting power on an annual basis. The plot relates the annual change in the S&P 500 index to the annual net change in the equity trading float as a percentage of total market capitalization per TrimTabs for 1995-2007. According to TrimTabs liquidity theory, the larger (more negative) the contraction in trading float, the more the price of equities in aggregate should rise. The negative slope of the best-fit line for this limited data set supports that hypothesis, but the the R-squared statistic is just 0.04, indicating that liquidity as defined by TrimTabs explains just 4% of the annual variation in the S&P 500 index over the past 13 years.

Why does this statistic indicate such a weak relationship? The largest stock gains come when net trading float is just slightly negative rather than very negative. In particular, the three points at the far left (2005-2007) indicate relatively sharp contractions in the supply of stocks, but only modest increases in stock prices. It appears that other factors besides stock supply and demand are important.

Note also that this sample is too small for reliable inference, as evidenced by dramatic changes in results from excluding a few data points. For example:

• Excluding just the most recent 2005-2007 data points at the far left as outliers, the slope of the best-fit line remains negative and R-squared increases to 0.47, a substantial increase in explanatory power.
• During bull market years (excluding the three data points for 2000-2002 in the lower-right quadrant), the slope of the best-fit line is positive. Stock returns tend to decrease rather than increase as the supply of stocks goes down, with a comparable R-squared of 0.45.

The instability of the relationship casts doubt on TrimTabs liquidity theory.

See Guru Grades for a snapshot of the accuracy of various experts in predicting the direction of the U.S. stock market, including links to evaluations of the commentaries of other individual market pundits and gurus.

For some research relevant to TrimTabs liquidity theory, see the Buybacks-Secondaries category.

		S&P 500 Index
Date	Comments re:  Charles Biderman/Trim Tabs at MarketWatch, CNN/Money and TheStreet.com	5-Day Return	21-Day Return	63-Day Return	254-Day Return
8/4/10	“It’s probably time to head for the hills.”	-3.4%	-3.3%	5.1%		+
5/18/09	“The message the ‘house’ is sending is clear — investors should get out of the stock market.”	0.1%	0.1%	10.4%	17.8%	-
8/6/07	The current combination of record float-shrink by companies and apathy by mutual fund investors suggests that the U.S. bull market has a lot further to climb.	-1.0%	0.3%	2.8%	-13.7%	-
7/26/07	The TrimTabs chief is advising that investors take lower pricing in stocks as an opportunity to buy more of their favorite mutual funds.	-0.7%	-0.2%	2.5%	-14.8%	-
6/12/07	…massive selling suggests the sell-off is closer to its end than its beginning.	2.7%	3.7%	-2.8%	-8.9%	+
3/16/07	Charles Biderman…remains bullish… “I think this is a tremendous buying opportunity.”	3.5%	6.1%	9.8%	-6.4%	+
11/24/06	He advises clients to align themselves with the corporate “smart money” and get fully invested now…	-0.3%	1.1%	-0.1%	4.9%	+
10/18/06	As equity markets rise, individuals are lured into buying… By the time they’ve invested, the smart money…has usually stopped buying equities and gone elsewhere…this unhappy cycle may have begun again…	1.2%	2.5%	4.7%	11.2%	-
5/25/06	…Biderman…last week changed his stock market recommendation to neutral from bullish.	1.2%	-1.8%	1.6%	20.2%	+
12/30/05	…this year’s record buybacks and takeovers are a sign that the market is likely to appreciate [in 2006].	3.4%	2.7%	3.7%	12.9%	+
11/15/05	TrimTabs Investment Research said Tuesday it sees a 20% gain in the U.S. stock market from current levels by the end of May 2006…	2.6%	3.4%	4.1%	14.0%	-
8/11/05	…he has recently turned neutral on the market…	-1.5%	0.2%	-1.6%	3.9%	+
12/21/04	“…the stock market should enjoy a big rally though at least the middle of January. …This is a short-term bullish call.” …However, Biderman said he expects the trend to reverse…in late January and into February…	0.7%	-3.1%	-2.8%	5.2%	-
8/20/04	“Now if we can just get past these terrorism fears surrounding the Olympics and Republican convention, stocks should be moving higher.”	0.9%	2.8%	7.6%	10.9%	+
7/28/04	Trim Tabs…said a “significant” rally was possible. “…more money in the hands of stock market intermediaries and a declining trading float of shares will spark a significant stock market rally.”	0.3%	0.9%	-0.1%	12.7%	-
4/2/04	“We turned bullish on Tuesday.”	0.3%	-1.9%	-1.4%	4.3%	-
2/2/04	The current stock market is a bubble waiting to burst. …exactly when the top will occur…could be as soon as February, but it could also be several months from now.	0.4%	1.4%	-2.5%	4.8%	-
1/23/04	Biderman worries that the market could be in for a repeat of 2000…	-0.9%	-0.2%	-0.1%	2.8%	-
11/2/03	“Now’s the time the suckers are getting ready to be fleeced.”	-1.1%	0.5%	7.3%	10.1%	-
10/1/03	…a recipe for “stock market indigestion.”	1.5%	2.8%	9.0%	11.4%	-
9/24/03	“The action feeding the new bubble is in chat-room stocks,” said Biderman, whose firm declared “the bubble is back…”	0.9%	2.4%	8.3%	10.0%	-
8/6/03	…Biderman declared himself to be “cautiously bearish.”	1.8%	5.6%	9.5%	11.6%	-
7/29/03	Better economic and market conditions…prompted TrimTabs.com to urge investors to hedge short positions they hold in stocks… Biderman told clients that he would still short tech, media and telecom stocks.	-2.4%	0.8%	4.0%	11.9%	+
7/1/03	If the tools Charles Biderman uses to forecast the market’s climate are precise, then investors should brace for a summer squall that could give back all of the second quarter’s double-digit gains — and then some… “If you’re a trader, my recommendation would be to go short stock index futures here.”	2.0%	0.8%	2.5%	13.6%	-
6/18/03	Charles Biderman…said he’s recently become more bearish… “When investors go on vacation, they usually take their check books with them…. Therefore, the stock market drops during most of July and August. That again should happen this go around.”	-3.4%	-1.7%	1.9%	12.3%	+
5/28/03	…Biderman has become “fully bearish”…	3.5%	3.4%	4.2%	17.6%	-
5/5/03	Trim Tabs said it has turned “cautiously bearish” from “neutral…” The fund tracker believes an intermediate-term market downturn is likely until corporate buying resumes, but said the long-term uptrend was still safe. “We still think the stock market is in a new bull market,”	2.0%	6.4%	5.8%	20.2%	-
4/25/03	…Biderman believes a new bull market has begun…	3.5%	5.9%	9.2%	24.9%	+
8/26/02	Typically, flows follow performance, but this hasn’t been the case in August — an indicator that makes Trim Tabs President Charles Biderman bullish.	-7.4%	-11.4%	-1.5%	5.8%	-
7/22/02	“The last time we saw anything close to this was the week the stock market reopened (following Sept.11)…”	9.6%	14.3%	7.2%	19.7%	+
6/7/02	Money leaving stock funds rose to $8 billion in the first three days of this week, which could signal a bottom…	-2.0%	-7.3%	-14.4%	-2.9%	-
3/18/02	Charles Biderman is decidedly negative about the March stock market. …All of this points to “a rough end of March…”	-2.9%	-3.4%	-13.6%	-24.9%	+
2/4/02	“Several liquidity measures have not been this bearish since August 2000.”	1.6%	6.2%	-1.9%	-23.4%	-
1/23/02	TrimTabs said it expects the stock market to decline significantly from recent highs… “The Nasdaq could drop below the September 11 low.”	-1.3%	-3.4%	-2.4%	-24.9%	+
8/4/01	Trim Tabs…turned cautious from outright bearish last week…	-0.8%	-5.7%	-7.1%	-23.4%	-
5/4/01	…rising in-flows are “a fairly recent phenomenon, so that makes us cautious.”	-1.7%	1.3%	-3.6%	-13.4%	+
4/16/01	“…the market should go up for a week or so…”	3.8%	5.9%	3.1%	-7.3%	+
3/12/01	According to Charles Biderman of Trim Tabs.com, a financial research organization, investors need to act quickly, since he thinks the market has hit bottom.	-0.8%	-1.0%	7.2%	-2.4%	-
2/26/01	Charles Biderman thinks the outflows point to at least a short-term bottom for stock prices. …he declares himself “cautiously bullish” this week.	-2.1%	-6.7%	2.0%	-8.3%	-
1/17/01	All of this — along with other indicators that Biderman watches — has him feeling very good about the market.	2.6%	-0.2%	-10.4%	-14.8%	-
12/27/00	…the drop in margin is not yet sufficient to signal a bottom for stocks…	0.3%	2.7%	-13.2%	-12.3%	+
11/28/00	Biderman says higher cash may portend well for stocks in the coming weeks or months. “It’s sort of like you have a huge herd of restless cattle looking for a gunshot that will send them stampeding into buying.”	3.0%	-0.1%	-7.2%	-12.6%	+
1/20/00	“The next downturn in stock prices is likely to create a whirlpool that will suck the Nasdaq 100 and other Internet favorites at least 50% below their recent peaks.”	-3.3%	-6.9%	-0.3%	-5.9%	+

You May Also Enjoy...

• Aggregate Buyback Activity a Useful Stock Market Indicator?
• Individuals => Institutions: One-Way Flow?
• Net Flow of Cash from Company to Investors as a Return Indicator
• Aggregate Money Flow a Useful Stock Market Indicator?
• Short-term Net Money Flow and Stock Returns