Stock Buybacks at fastest pace since 2007

In yet another sign of market over-exuberance, the Wall Street Journal reports Share Repurchases Are at Fastest Clip Since Financial Crisis.

Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008.
The growth in buybacks comes as overall stock-market volume has slumped, helping magnify the impact of repurchases. In mid-August, about 25% of nonelectronic trades executed at Goldman Sachs Group Inc., excluding the small, automated, rapid-fire trades that have come to dominate the market, involved companies buying back shares. That is more than twice the long-run trend, according to a person familiar with the matter.

Large Repurchases in 2014
Share Repurchases

Rewarding Investors – Not

Share Repurchases2
Contrary to the above graphic (and common wisdom), companies do not reward investors by buying back shares at inflated prices. Companies bought back the most shares in 2007, right before the crash, and the least shares at the most opportune time in 2009.

In practice, insiders buy low and sell high, and pocket cash from options all the way up. Insider activity is exactly the opposite of how companies treat shareholders.

What Happened to the Fed Rally?

This morning many of us wondered whether Wednesday’s Fed rally on the release of the FOMC minutes (which had a definite dovish tilt) would see a follow through or fade. The answer is now in. The S&P 500 plunged 2.07 percent Thursday, erasing all of Wednesday’s gain and then some. The popular financial press is filled with the usual array of opinions, as the battle of the bulls and bears heats up. Thursday’s selloff was the fourth largest daily decline of 2014.

The yield on the 10-year Note ended at 2.34 percent, down only 1 basis point (bp) from Wednesday’s close and tied with its 2014 closing low hit on two previous occasions.

Here is a 15-minute chart of the past five sessions.

SPX-141009

Here is a daily chart of the SPY ETF. Thursday’s rout came on extremely high volume, double its 50-day moving average and higher than yesterday’s Fed-inspired rally.

A Perspective on Drawdowns

The chart below incorporates a percent-off-high calculation to illustrate the drawdowns greater than 5% since the trough in 2009.

Click to View

For a longer-term perspective, here is a pair of charts based on daily closes starting with the all-time high prior to the Great Recession.

Click to View

Click to View

By Doug Short, Advisor Perspectives

Also by Doug Short: “Lies, Damn Lies, and Statistics.” Read…. How to Obscure one of the Biggest Economic Problems in the US

The Bottom May Be Falling Out of the market–Here’s some ideas of What To Do

Just a few months ago, all was quiet on the investing front, as most market indices continually broke new all-time highs. But in early August, the quiet was broken by a sudden surge by the dollar against the euro, the yen, Australian dollar and other currencies. At the time, the rallying dollar was merely seen as the beneficiary of a relatively robust U.S. economic growth rate in 2015, at least compared to Europe and Japan.

In hindsight, the currency shifts now appear to be the result of something more concerning: European economic activity has slowed to a crawl, the Chinese government is leaning towards a policy of reform over stimulus — compounded by brewing political troubles in Hong Kong — and U.S. investors are finally waking up to the reality that global economic growth will likely be subpar in 2015.

That dim view may also explain why West Texas Intermediate Crude Oil has now slipped below $90 a barrel for the first time in 17 months. Then again, oil prices may be slumping because the dollar is rallying, which always hurts the price of commodities such as oil. Or perhaps it’s the fact that too much oil is being produced at a time when global demand is slackening.

In other words, there are now a number of moving parts in play, and the factors behind these recent shifts are likely to persist. How you position your portfolio for the changing market can spell the difference between capital preservation and capital erosion.

Indeed many portfolios are already feeling the pain. Small caps are now in a correction, and despite a boost from Friday’s jobs reports, larger stocks have started to move off of their highs: the Dow Jones Industrial Average and the S&P 500 have both breached support at 17,000, and 2,000, respectively.

The key question, how will the markets play out from here? Let’s start with the dollar. We know that the Federal Reserve will end its bond buying program later this month, even as the European Central Bank and the Bank of Japan appear poised to stimulate their own economies. Foreign currency strategists think the divergent interest rate policies over the next few quarters could lead to a further 10 percent rally in the dollar. And that’s bad news for oil, gold or any other commodities priced in dollars — a stronger dollar erodes the buying power for people holding other currencies.

West Texas Crude

As a result, it’s time to re-check your portfolio’s direct and indirect exposure to commodities. For example, oil services companies such as Schlumberger Limited (NYSE: SLB) might see a sharp drop in demand if oil drifts towards $80 per barrel. At that price, many global energy drilling projects become less feasible, crimping demand for oil services equipment such as drilling rigs.

More broadly, investors need to know how each stock in their portfolio is valued. If the major indexes start to move lower, investors will quickly shed their stakes in the market’s highflyers. These were the first to crumble in 2008 when investors fled to the safety of value stocks.

EPS

This is a good time to prioritize your holdings in terms of their relative valuations. Any stocks that sport high valuations should be candidates for portfolio pruning. If history is any guide, you’ll be able to re-acquire these stocks at lower prices when the market finds its footing.

But when will the market find its footing? Understand that the market is driven by herd dynamics. Investors often sell because they fear that mass psychology will lead others to sell. And right now, investors are getting anxious. In the weekly survey conducted by the American Association of Individual Investors, 35% of respondents were bullish on October 2, down from 52% in late August. History has shown that this figure needs to fall to 25% for stocks to truly capitulate, which often sets the stage for next market upturn.

The good news: any stocks in your portfolio that generate solid metrics from a price-to-earnings or price-to-free-cash-flow basis, or sport a solid and sustainable dividend yield are likely to fare well in a tough market. That doesn’t mean they won’t drop in value, but will likely fall at a much lesser rate than more highly-priced stocks.

To be sure, the U.S. economy still appears poised for solid expansion in 2015. At least that was the conventional wisdom until a week or so ago. Since then, we’ve learned of a pullback in consumer sentiment and also in manufacturing and construction. Is the U.S. economy starting to feel the impacts of various global crises? It’s too soon to know, but we’ll know more about that as earnings season gets underway next week.

Risks to Consider: As an upside risk, perhaps the U.S. economy will grow as robustly in 2014 as many economists still believe, in which case stocks don’t have too much downside. The only reason to fear a growing bear market is if the U.S. economy starts to weaken in coming quarters. As of now, that is an unlikely scenario.

Action to Take — Net-net, this is a time for caution. It’s OK to begin to nibble at beaten down value stocks, many of which reside in the small cap market. But there is no reason to be a hero and buy the current market pullbacks with a lot of financial firepower. The recent market gyrations suggest that more choppiness lay ahead, and it pays to remember that stock markets can go down a lot faster than they go up. I am not anticipating a rapid market plunge, but history has shown that if buyers pull away in the coming days, then a 10% drop from here can play out in 8-10 weeks. Over the course of the current bull market, we’ve had several such mini-slumps. The good news: When the sellers exhaust themselves, idle cash can be profitably put back to work.

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How to apply moving averages

(Video) How to Apply Moving Averages as a Trading Tool

By Elliott Wave International

A moving average (MA) is one of the simplest technical tools an analyst or trader can use. The most common one is the simple moving average (SMA). A 200-period SMA often determines trend, support and resistance. Dual moving averages, which are popular, are the basis of many trading systems.

In this 6-minute video lesson, Elliott Wave International’s Jeffrey Kennedy explores different types of moving averages and how you can apply single, dual and multiple moving averages on your charts.

If you enjoy this lesson, learn how you can download Jeffrey’s 10-page eBook, How to Trade the Highest Probability Opportunities: Moving Averages.


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This article was syndicated by Elliott Wave International and was originally published under the headline (Video) How to Apply Moving Averages as a Trading Tool. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Don’t Get Ruined by These 10 Popular Investment Myths

Don’t Get Ruined by These 10 Popular Investment Myths
Interest rates, oil prices, earnings, GDP, wars, terrorist attacks, inflation, monetary policy, etc. — NONE have a reliable effect on the stock market

By Elliott Wave International

You may remember that during the 2008-2009 financial crisis, many called into question traditional economic models.

Why did the traditional financial models fail? And more importantly, will they warn us of a new approaching doomsday, should there be one?

This series gives you a well-researched answer.

Here is Part IV; come back soon for Part V.


Myth #4: “Earnings drive stock prices.”
By Robert Prechter (excerpted from the monthly Elliott Wave Theorist; published since 1979)

This belief powers the bulk of the research on Wall Street. Countless analysts try to forecast corporate earnings so they can forecast stock prices. The exogenous-cause [i.e., news-driven -- Ed.] basis for this research is quite clear:

Corporate earnings are the basis of the growth and the contraction of companies and dividends. Rising earnings indicate growing companies and imply rising dividends, and falling earnings suggest the opposite. Corporate growth rates and changes in dividend payout are the reasons investors buy and sell stocks.

Therefore, if you can forecast earnings, you can forecast stock prices.

Suppose you were to be guaranteed that corporate earnings would rise strongly for the next six quarters straight. Reports of such improvement would constitute one powerful “information flow.” So, should you buy stocks?

Figure 9 shows that in 1973-1974, earnings per share for S&P 500 companies soared for six quarters in a row, during which time the S&P suffered its largest decline since 1937-1942.

This is not a small departure from the expected relationship; it is a history-making departure. Earnings soared, and stocks had their largest collapse for the entire period from 1938 through 2007, a 70-year span! Moreover, the S&P bottomed in early October 1974, and earnings per share then turned down for twelve straight months, just as the S&P turned up!

An investor with foreknowledge of these earnings trends would have made two perfectly incorrect decisions, buying near the top of the market and selling at the bottom.

In real life, no one knows what earnings will do, so no one would have made such bad decisions on the basis of foreknowledge. Unfortunately, the basis that investors did use — and which is still popular today — is worse:

They buy and sell based on estimated earnings, which incorporate analysts’ emotional biases, which are usually wrongly timed.

But that is a story we will tell later. Suffice it for now to say that this glaring an exception to the idea of a causal relationship between corporate earnings and stock prices challenges bedrock theory. …

(Stay tuned for Part V of this important series, where we examine another popular investment myth: Namely, that “GDP drives stock prices.”)


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