Holding equities during conditions of poor market internals and high market valuations is not investing – it is speculating. Add to the mix a rapidly rising aversion to risk in bond market then it becomes high risk speculating. The question of the day is who is buying and propping up this market if the vast majority of stocks are in a correction and the smart money is taking shelter. Who would buy stocks with little regard to risk?
Bank of America provides a table that shows all classes of investors are showing outflows except one – the corporations themselves. In many cases, corporations are leveraging up the balance sheet with more debt to buyback their own stocks. This props up their stock price and increases the all important earnings per share metric even when profits are flat.
All research shows that CEOs perform the most buybacks (with other people’s money) as the market peaks but cut back buybacks when their stocks are truly undervalued at market bottoms. Since CEO pay is tied to share price and earnings per share, it does not take imagination to come up with why they are described as “price insensitive”. But I would call them “risk insensitive” since they are actually price sensitive for the opposite reasons of typical investors.
As I have pointed out previously, the market has had some pretty unusual support at key support prices from a technical analysis point of view. If prices drop below certain levels, the technical picture for the market as a whole turns decidedly negative and their would be significant technical selling. With the state of market internals, I would expect a significant correction in excess of 10% for the S&P 500 once technical support is breached. Since I also think the market is in a topping process, this would be the beginning of the bear market (double peak aside).
Market tops present problems to Wall Street and smart money. How do you sell at the highest prices without sending the market into a tailspin. The answer is that it simply takes time – market tops last many months as the smart money sells to the risk insensitive buyers. Corporate CEOs are not the only risk insensitive buyers. Automatic 401k and TSP investment plans steadily buy into the market among others. But this had me wondering if buybacks were steady or could they be used by the smart money to avoid the breaching of technical support to buy more time before the market succumbs.
The Bloomberg headline Goldman Buyback Desk Saw Record Volume in Wednesday Rebound on 14 August 2015 certainly got my attention. Yes it certainly appeared the market was “saved” one more time as the NYSE and then the S&P 500 approached critical technical support for the fourth time. Buying on pull backs makes since for any buyer, but would Goldman Sacs a pillar of Wall Street integrity encourage spiking corporate buybacks at critical market support. Of course not, that would be manipulation but let’s take a look anyway.
In the chart above, the red candlesticks show the daily action of the S&P 500 as represented by the SPY ETF. The black line represents the relative performance of the SPYB ETF over the SPY ETF. SPYB invests in the stocks performing the most buybacks within the S&P 500 population of stocks. A spike in the relative performance of the SPYB buyback index would highlight significant buyback activity on those days.
We see an unusually high spike in March. As the NYSE approached this same level on 8 July, the buyback index (SPYB) once again spiked and helped push the market back into rally mode. You might also remember that 8 July was also the day the New York Stock Exchange “broke” for half the day just as the market breached technical support.
The third arrow occurred on 28 July two trading days after I wrote in TSP Charts: TGIF that the market was once again approaching critical support and joking that the NYSE might need to “break” again. It did not of course, but the buyback metric sharply reversed at support levels. The last up arrow occurred on 14 August and was reported in the Bloomberg article as one of the busiest days for the Goldman buyback desk. How lucky the market is to have risk insensitive buyers locked and loaded to buy when needed.
So if the only investor class with positive inflows into the market are the corporations themselves, we have to wonder how long this risk insensitive buying can hold the market above critical technical support levels. Typically, SPYB outperforms the during market pullbacks. As we see in the chart above the SPYB to SPY ratio has been trending down along with the S&P 500 index since the market peak in mid-May. The last time a similar pattern occurred was in 2007 which has me thinking the market is skating on very thin ice.
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