Q: Why do markets fall late in the day? A. Buybacks, perhaps

Tracking selling into the close
Tracking selling into the close   

It's not your imagination--stocks have been unusually weak during the last half-hour of trade lately.

As it turns out, that's also when the biggest buyers of this rally walk away.

Puzzled by the perceived weakness, market technician J.C. O'Hara of FBN Securities ran the numbers and found that in fact, while the S&P 500 Index has been slightly higher on the year, "if you were just to buy the last half-hour of each day, you'd be down 2 percent."

"It's unusual," he told CNBC's "Closing Bell", "because we are in a bull market."

In a bull market, that is, stocks should generally do better near the close and be slightly weaker at the open. As O'Hara said, "you'd want to trade against the first half-hour, and with the last half-hour."

Yet this time is different.

There could be any number of reasons, to be sure, but one in particular speaks to the larger truth about the stock market's now six-year-plus rally. Guess who has a deadline starting at 3:30 p.m. (a half-hour before the official 4 p.m. close) to buy stocks? The listed companies themselves.

To be sure, the biggest, most liquid names have until 3:50 p.m., and some traders question whether corporate buying really has an impact. "I don't see it," said one floor governor on the New York Stock Exchange.

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Rally powered by corporate issuers themselves

"If you're running a business for the long term, the last thing you should be doing is borrowing money to buy back stock." -Stanley Druckenmiller, founder, Duquesne Capital

That said, corporate America has been pretty much the only buyer of this rally that most everyone else—individual investors, pension funds, macro hedge funds—has sold.

There were $141 billion of stock buybacks authorized in April alone--a new record, according to Birinyi Associates. If the year-to-date pace keeps up, 2015 will record $1.2 trillion in total buybacks, handily outpacing the previous annual high of $863 billion set in 2007.

Indeed, share repurchases have become so commonplace that there are entire funds, like the TrimTabs Float Shrink fund, and the PowerShares Buyback Achievers Portfolio, tracking them as an investment strategy.

After all, the fewer shares outstanding, the better a company's earnings per share, the higher the valuation of each share—assuming the market valuation of the entire company doesn't change—and the more lucrative the stock options executives can exercise.

The central question for investors, then, is whether corporate America's appetite will wane as stock prices continue moving gradually to new highs.

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Brian Reynolds, chief market strategist at New Albion Partners, sees no sign that it will.

"There has never been a valuation level so high that CEOs as a group have stopped buying," he wrote in a recent client note.

"What has stopped them from buying has been the credit crisis of 2000 and the credit crisis of 2007," he added. At those market peaks, when companies were still buying, the price-to-earnings ratio of the S&P 500 was 29 and 25, respectively. Today, the market's "multiple," or premium paid per dollar of earnings, is a little under 19. That is based on Reynolds' formula of using two quarters of past and two quarters of estimated future earnings.

In other words, Reynolds said, stocks today are nowhere near "too high" for companies to stop buying.

Pressure may well come from elsewhere, whether shareholders concerned about the best use of corporate cash in the long term, or policymakers desperate for more investment in the economy. However, such pressure remains relatively low at the moment.

Meantime, other buyers could certainly step to the fore, such as individual investors who finally come back around to the market, or larger funds.

Yet it is precisely the reluctance of pension funds to enter the stock market that is helping to fuel its continued, buyback-led rally. It is also behind the worrisome rise in debt-fueled buybacks.

Public pension funds "don't want the perceived risk of stocks, yet they need to make 7.5 percent, so they keep pouring money into levered credit funds," said Reynolds. "That's why we're having such an intense credit boom."

And that "daisy chain" of credit flows is providing companies with the financing for buybacks that lift share prices.

Why piling on debt is 'nuts'

"I think it's nuts," said billionaire Stanley Druckenmiller, one of America's most successful investors, at a New York event last month. "If you're running a business for the long term, the last thing you should be doing is borrowing money to buy back stock."

Druckenmiller told CNBC in March that he is extremely concernedabout the doubling in U.S. corporate debt to roughly $7 trillion, up from about $3.5 trillion in 2007.

"Most of that mix has been in more highly leveraged stuff," he said. "And if you look at what corporations have been using it for, it's all financial engineering."

Pavilion Global Markets, a Montreal-based brokerage, points out the buyback yield of American stocks is far higher than in the other two major regions, Japan (based on the Nikkei 225), and Europe (using the STOXX Europe 600 index).

The S&P 500 has a buyback yield of 2.82 percent, they reckon, versus 0.95 percent for Japan and 0.87 percent for Europe.

The trouble is that bond issuance, including "debt issues specifically to finance share buybacks," has also been growing. Most notably, the largest growth has taken place in the U.S. which Pavilion notes "hurts shareholder rewards."

Indeed, that largely offsets the buyback yield in Pavilion's calculation of total shareholder yield for each major region, making European stocks slightly more attractive to American ones for the time being.

As for the U.S. market, the healthiest development would be stocks bought by a wider array of investors, while the companies themselves take a breather—especially with regard to debt-fueled buybacks.

Will that actually happen? Well, the last half-hour of trade will at least be a useful gauge.

Note: This story has been updated to correct the buyback deadline for the biggest listed companies and to include comment from a floor governor.