Guru Grades

Charles Biderman, Going with the Flow (Last Updated 5/9/08)

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 presents highlights from his commentary and shows the performance of the S&P 500 index over the 5, 21, 63 and 254 trading days after the publication date for each item. Red plus (minus) signs to the right of specific items indicate those that the market has subsequently proven right (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.
• Based on subsequent stock market performance and our judgments about his forecasts for overall stock market direction, Charles Biderman's U.S. stock market forecast accuracy rate is 45%, which is a little below average. His forecast sample size is small, as is our confidence in this score.

In summary, Charles Biderman's reliance on TrimTabs liquidity theory for U.S. stock market forecasting results in an accuracy rate a little below average. Confidence in this conclusion 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 Blog Synthesis: Buybacks and Secondaries.