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Monday, July 14, 2014

Daily update 7/14

The futures had a 4.25 point intraday range.  If the range gets any smaller they might as well close the market.  Here is the daily SPX chart.

We started with a big gap up, but nobody seemed to know what to do with it as SPX was sideways after the open all day.  This was the third highest close on SPX ever and just a fraction below the 2nd.  There were 170 new highs (40 in SPX).  Not very good this close to all time highs, but what else is new.  I read today that we have had three of the top ten narrowest range days on SPX since 1972 in the last few weeks.  Even in a low volatility time period this is extremely low.  How long before it reverts to the mean?  Here is a look at the futures chart.

We got green bars again.  Is this a retest or start of another leg up?  The lack of enthusiasm today suggests it might just be a retest.  We will have to watch closely and see what happens.  Here is a look at the current breadth chart.

Both indicators are currently negative.  Retests that fail in this condition tend to lead to 5% or more pullbacks.  We haven't had one of these in quite some time.  Will the bears strike or will the bulls pull out another miracle save and propel the market higher?  The answer may lie with IWM.  It is clearly showing considerable relative weakness since March and is a key risk on/off index.  If we don't get more strength there pretty soon I would expect the market will roll over.  I would consider a break of the SPX 18 DMA as a sign the market is turning down.

I found this chart and article very interesting.

Source: Dr. Ed Yardeni

The bull market in the S&P 500 since March 2009 has been marked by corporations buying back their shares and paying out dividends. From Q1-2009 through Q1-2014, S&P 500 companies repurchased $1.9 trillion of their shares and paid out $1.3 trillion in dividends. During the first quarter of this year, buybacks totaled $637 billion at an annual rate, nearly matching the previous record high during Q3-2007.
As I have often observed in the past, corporations have an incentive to borrow in the bond market and use the proceeds to buy back shares when their earnings yield exceeds the corporate bond yield. That’s been the case since 2004 thanks to the Fed’s easy monetary policies under both Alan Greenspan and Ben Bernanke, and now Janet Yellen.

Buybacks are a form of financial engineering since they boost earnings per share whether a company’s fundamentals are improving or not. They’ve certainly contributed to the bull market’s great run in an economic environment that has been widely described as “subpar.”

When the next recession hits, corporate cash flow will decline and investors are likely to be less willing to buy corporate bonds. As a result, buybacks will dry up as they did during 2008, exacerbating the eventual bear market in stocks. 

I was shocked to see that companies bought back $1.9 trillion of their shares.  I view that as a complete waste of money.  It does absolutely nothing to generate future business.  What does that say about the state of the economy if they think that is the best use of excess funds?


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.