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Bear Trap 2
What I am not writing about
What I am writing about …
While ever so slight, the US dollar index closed just below critical prior swing low support level a week ago and then immediately reversed higher closing back into the channel on Friday. While volume is not available as this is not a tradeable index, using the tradeable proxy (UUP) the reversal occurred on almost 2x the volume.
Bear Trap Definition - A bear trap occurs when shorts take on a position when an investment is breaking down, only to have it reverse and shoot higher. This counter move produces a trap and often leads to sharp rallies.
With this weeks close back into the consolidation channel and combined with a higher close next week, this latest move could be a classic example of a bear trap. If so, I would expect we see a sharp rally in the coming weeks carrying the potential for the index to break out above the most recent 100-101 swing high.
Why do Bear Traps produce sharp rallies? - The first wave of buying will occur when the most recent broken support level is exceeded, due to the number of shorter term traders who have their stops slightly above the most recent swing high. The second wave of buying comes into play once the stronger realize that it is not just a dead cat bounce, but that the move has much bigger potential. This will produce the second bounce, which will often precede the short-term top in the counter move.
If all this talk about bear traps sounds vaguely familiar, it should. I wrote about another potential bear trap in the mining stocks back in February. Since that bear trap, the GDX has rallied almost 100%. Now, I am not saying the dollar will rally 100%, as that is all but impossible, but if this does turn out to be a bear trap the implications are enormous. A strong dollar can push bond prices higher (yields lower), make the recent rally in commodities, precious metals, emerging markets and large cap US stocks (with large foreign sales) a thing of the past as these typically move inversely to the dollar. Sure, money can be made by being long the dollar but it will pale in comparison to those who short those falling inversely correlated investments.
There are no guarantees, but if the dollar breaks higher, this is setting up to one be the best money making opportunities this year. Stay tuned as the next few weeks is going to get really interesting.
Make Sure You Have a Chair When the Music Stops
A very interesting read in the Bloomberg article below. Clearly this market is being driven by a different mechanism than those of the past and investors need to have a plan when corporate buybacks begin to slow.
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Buybacks at $46 Billion a Month Dwarf Everything in U.S. Market
The biggest source of fresh cash in American equities isn’t speculators or exchange-traded funds -- it’s companies buying their own stock, by a 6-to-1 margin.
Chief executive officers, who just announced the biggest round of monthly repurchases ever, executed about $550 billion of buybacks last year, according to data compiled by S&P Dow Jones Indices. That compares with a net $85 billion of deposits by customers of mutual and exchange-traded funds, the biggest gap since 2012, data compiled by Bloomberg and Investment Company Institute show.
If you sell a share of stock in the U.S. market, there’s a fair chance the buyer is the company that issued it -- and it’s buyers who’ve been on the right side of the trade since 2009. Buybacks are helping prop up a bull market that is entering its seventh year just as investors bail out and head back to bonds.
“Buybacks have come up in every meeting with clients and always have, because of the observation that the largest buyers of stocks have been companies themselves,” Dan Greenhaus, chief strategist at BTIG LLC in New York, said by phone. “For the last few years, that’s been the right call.”
Repurchases by U.S. companies averaged $46.1 billion a month in 2014, compared with $7.1 billion in ETF and fund inflows. Investors have pulled more than $10 billion out of equity funds in January and February and sent $38 billion to bonds -- even as companies announced $132.7 billion more in buybacks. February’s total of $104.3 billion was the highest on record, according to TrimTabs Investment Research.
Buyback Index
Companies with the most buybacks are beating the market. The S&P 500 is up 1.6 percent on the year after falling from a record on Monday to 2,092.21 as of 11 a.m. in New York. The S&P 500 Buyback Index, which contains the 100 companies with the highest repurchase ratio, has climbed 4 percent this year.
“It’s amazing that people are still sitting on the sideline getting zero-something percent returns,” Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said in a phone interview. “Usually when you get where everyone says we’re in a bull market you see big money coming out of lifeboats and chasing yield, yet we haven’t seen the mass money come in.”
The reluctance of investors to pile into equities has left corporate America the larger source of cash throughout the bull market. Buybacks exceeded inflows by $468 billion last year when the S&P 500 climbed 11 percent and $318 billion more in 2013, when the gauge had its biggest advance since 1997.
Companies in the S&P 500 have spent more than $2 trillion on their own stock since 2009, underpinning an equity rally in which the index has more than tripled. They were on pace to spend a sum equal to 95 percent of their earnings on repurchases and dividends in 2014, data compiled in October showed.
Buyback Incentives
Not everyone is convinced buybacks are good. They’re used to boost per-share earnings in a way that enhances the pay of chief executives, according to William Lazonick, a professor of economics at the University of Massachusetts Lowell.
“Companies use a phony ideology saying if you maximize your shareholder value you somehow increase the efficiency of the economy,” Lazonick said in a phone interview. “But the only justification for doing it that holds water is that executives get a lot of their income from buybacks.”
Home Depot Inc., Comcast Corp. and TJX Cos. were among 123 companies that disclosed repurchases in February. The increased buybacks came as plunging oil and a strengthening dollar threaten to stall five years of earnings expansions.
Profits from S&P 500 members will decline at least 3.2 percent this quarter and next, according to analysts’ estimates compiled by Bloomberg. For the full year, growth will be 2.3 percent, down from 5 percent in 2014.
Profit Contractions
Buybacks will boost per-share earnings, with the potential of helping avoid the first back-to-back profit contractions since 2009, according to Yardeni Research Inc.
“In the last earnings season, the strength of the dollar clearly had a negative impact on earnings guidance by a lot of companies,” Dan Miller, who helps oversee $23 billion as director of equities at GW&K Investment Management, said by phone. “In some cases, the announcement of buybacks was perhaps meant to soften the blow a little bit. It shows the management is committed to their own stock.”
Switching Positions
Corporations and investors have switched positions as the bigger buyer of stocks. Inflows from equity funds exceeded corporate buybacks every year in the late 1990s, contributing a total of $640 billion over the three years through 2000. That compared with $418 billion from share repurchases.
Companies have since taken the lead, with buybacks setting a record $589 billion in 2007. Last year, corporations beat all other groups as the biggest source of fresh cash to the stock market, according to a January report by Goldman Sachs Group Inc., which tracks money flows from pension funds, foreign investors and ETFs.
The S&P 500 will increase about 7 percent to 2,238 by the end of 2015, according to the average of 21 equity strategists surveyed by Bloomberg. The Nasdaq Composite Index closed above 5,000 for the first time in 15 years on Monday and is within 2 percent of a record.
S&P 500 companies hold $1.75 trillion in cash and marketable securities, data compiled by Bloomberg show.
“These companies do this because they can,” Richard Sichel, chief investment officer at Philadelphia Trust Co., which oversees $2 billion, said in a phone interview. “So many have tremendous amounts of cash historically and the investment rates on short-term cash are not too attractive. It’s good for the company and good for stockholders.”
March's Charts on the Move Video
With the market reaching its expected target out of the divergent low "W" bottom, active investors should be sharpening their pencil and refining their plan for a consolidation or worst case test of February's lows. Consolidations eventually lead to strong moves. My latest video, view-able at the link below, outlines which way i think we go. Let me know what you think.
Politics and the Economy
While the markets take a breather and consolidate I thought it be fun (or not) to step away for a quick look at politics (a subject I try to avoid). The WSJ asked economist’s their view on the potential impact the individual presidential candidates would likely have on the economy. Like all predictions, I put zero faith in the results but find the discussion interesting and fodder for some fun.
Q: Why did God create economists? A: In order to make weather forecasters look good.
Three econometricians went out hunting, and came across a large deer. The first econometrician fired, but missed, by a meter to the left. The second econometrician fired, but also missed, by a meter to the right. The third econometrician didn't fire, but shouted in triumph, "We got it! We got it!"
A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Lets smash the can open with a rock." The chemist says, "Let’s build a fire and heat the can first." The economist says, "Let’s assume that we have a can-opener.”
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More than three-fourths of forecasters in a new Wall Street Journal survey say the presidential election has introduced more uncertainty than is typical from a change at the White House.
Their current economic forecasts aren't all rosy: On average they see about a 20% risk of recession in the next year, down slightly from 21% in the previous survey. They forecast the economy will be too fragile for the Federal Reserve to raise rates before June. They predict the economy will add fewer jobs this year than in 2014 and 2015.
More than four-fifths of economists rate the possible election of either Mr. Sanders or Mr. Trump as an outcome that may force them to lower their economic forecasts. About half the survey’s respondents rate them as “significant” risks. Regardless of who wins, it is unlikely the new president would be able to change policy quickly enough to affect 2017.
As with most things, the economists polled could not reach consensus, unlike their past recession predictions where they accurately forecasted 29 of the last 3.