Buybacks vs. The Seasonal Slump
The S&P 500 Index is now within spitting distance of new all-time highs. Less than 0.5% away from the January peak to be exact.
However, market internals are not offering much support for the push into new record territory for stocks.
In the plus column, the NYSE and S&P 500 advance-decline lines — which measure the number of stocks moving up versus down — both recently notched new highs.
And both the S&P and Dow have been up for six weeks straight.
But there is a growing list of red flags in the minus column too.
First, the small-cap Russell 2000 Index, which has led stocks higher most of this year, is now struggling, barely able to stay above the widely watched 50-day moving average.
And for the broader market, the overall percentage of stocks above their 50-day moving average dropped to 48.2% last week. This means the majority of stocks, 51.8%, are in downtrends.
Second… As you can see in the chart above, just 3% of stocks in the S&P 500 Index are trading at their 52-week highs right now.
This means 97% of stocks in the index are falling short of new highs even as the index itself is less than half a percent away from its record high!
In the Nasdaq, the number of stocks making new 52-week lows exceeded those making new highs on four out of five days last week.
So that’s the bad — now what’s the good news?
According to Goldman Sachs, U.S. companies are on track to buy back more than $1 trillion worth of their own shares this year, a record high.
In fact, buybacks have played a huge role in this bull market over the last 10 years. Twenty-six of the stocks in the Dow 30 have seen their shares outstanding decline over the past decade.
In total, shares of stock outstanding have dropped 15% overall since 2010. That’s a total of more than 12 million shares repurchased!
The basic rules of supply and demand say that record stock buybacks keep the stock market well supported. And now that earnings season is winding down, U.S. companies will be back and buying up plenty more shares.
Right now, excellent earnings and the record buyback boom are battling soft stock market seasonality for the upper hand.
Seasonality could gain the short-term advantage, since August and September are historically lousy months for stocks.
But longer term, my money is on growing profits and buybacks.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch