Kensho Trade: Buyback party may be over

Published Tue, Mar 22 20165:00 AM EDTUpdated Tue, Mar 22 20165:45 AM EDT

The market has rebounded by a double-digit percentage since the February lows. Many factors such as the bounce in oil and the Federal Reserve 's dovish signal helped, but there may be another force at work — share buybacks. How can investors trade the market? Using data from Kensho, a tool designed to quantify historical market events, CNBC Pro analyzed the impact of stock buyback seasonality on market returns. Stock prices go up when companies are buyers. And when there's a lull in buyback activity, markets typically enter troughs. February and March are big months for companies to purchase their own shares, according to Kensho. Since 2010, the two months represented a combined 35 percent of annual S & P 500 buybacks. During those periods, the major U.S. benchmarks have traded positive in every instance. The S & P 500 has returned 5.4 percent on average while the small cap Russell 2000 has been the biggest winner, returning 7 percent on average. But as March comes to a close, so may the buyback bump and the rally. Kensho data show that the next five months, April through August, have accounted for just 25 percent of buybacks. In those instances, all the major benchmarks have traded lower the majority of the time and posted negative average returns. Read More Najarian: Buy this biotech stock Furthermore investors should watch out for quarterly blackout periods before earnings releases. That's when company insiders and employees are prohibited from trading shares of the company, while financial statements are being prepared. Therefore, no buybacks. The latest one began Sunday. Brian Kelly at Brian Kelly Capital notes that some of the biggest market swoons over the past few years have all occurred during those earnings season blackouts. Source: Deutsche Bank, BKCM He also notes that the 2016 low came right at the end of a blackout and markets have rallied huge since. Source: BKCM Past performance is no guarantee of future returns, but the "buyback factor" may be something to keep in mind as we head into not just another blackout period, but the five month stretch where buyback activity has historically lulled. Read More Options strategies with Pete Najarian Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.

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How can investors trade the market?

Using data from Kensho, a tool designed to quantify historical market events, CNBC Pro analyzed the impact of stock buyback seasonality on market returns.