In last Tuesday’s technical update, I discussed why a rally last week was highly probable from a psychological, technical, fundamental, and seasonal perspective. However, the key message of that discussion was simply:
“There remains an ongoing bullish bias which continues to cling to the belief this is ‘just a correction’ in an ongoing bull market. However, there are ample indications the decade-long bull market has come to its inevitable conclusion.”
On Saturday, I explained why we “sold the rally” the preceding Friday morning:
“The combination of both the extreme oversold and deviated conditions contributed to a bounce which hit our ‘target neighborhood’ of 2740-2750 on Friday morning.
In accordance with our portfolio management strategy, when the markets reached our target zone yesterday morning we executed sells of positions that have been under-performing both the market and other holdings within our portfolios. As we have stated many times previously, one of the primary tenants of portfolio management is to ‘sell losers.“
Currently, there is a rising risk of further corrective actions as the previous tailwinds supporting the bull market have begun to shift to headwinds.
Stock Buybacks
We have discussed previously the short-term effect of the tax cut legislation last December on share buybacks. To wit:
“The problem is that the tax plan may not provide the benefits as hoped. While President Trump suggests the plan will return ‘trillions’ of dollars locked up overseas to create jobs, the reality, according to Goldman Sachs, is likely closer to $250 billion that will primarily go to share buybacks, dividends, and executive compensation.”
That turned out to be a fairly accurate analysis as repatriation of dollars was roughly $300 billion, rather than the “trillions” as promised, in Q1. Importantly, that number is dropping sharply in Q2 as the incentive is being quickly absorbed. Via Zerohedge:
“After an initial record surge in the amount of US corporate cash repatriated from offshore jurisdictions (if only for accounting purposes, as the bulk of said cash was already largely invested in domestic securities via offshore entities) following Trump’s tax law overhaul and tax repatriation holiday, the movement of foreign cash has slowed sharply.”
Of course, as I have stated repeatedly over the last year, there is little incentive for companies to raise operating costs (wages, CapEx, etc) which erodes “earnings per share.” Therefore, the best “use of funds” has been share buybacks. As shown in the chart below, the surge in announced share buybacks surged after Q1 as dollars were repatriated which led to a subsequent surge in share count reductions.
