Last night $IBM reported basically garbage numbers exemplifying the issue I raised in the buyback article: Companies using financial engineering (buybacks and tax rates) to manage their earnings higher while barely growing earnings organically while experiencing regressive revenues. $IBM specific: IBM 2013 capex: $3.8 billion, half a billion less than 2012. IBM 2013 Stock repurchases $13.9 billion, $1.9 billion more than 2012. All this while missing revenues. In summary: less capital investment, less revenue, but expanding spending on buybacks to massage numbers higher. The result:
What’s of note here is that we are beginning to see a market of bifurcation. What I mean by that is that companies that can be measured with real results are starting to get hammered and companies with little real results that are based on future promises are pushed into the stratosphere. Who am I talking about? $IBB biotech stocks, $TSLA, $AMZN, $FB, $TWTR, small cap $IWM $RUT, etc. Basically high P/E companies that tell a narrative about the future, but show little actual earnings. There are exceptions of course, but looking at the relentless buying in some indexes such as $IBB and $IWM we are seeing a frantic chase for return.
Yet who are the buyers? The low volumes continue to suggest that this is not a broad based rally, but a narrowing one as the MACD’s of the major indices such as $DJIA and $SPX continue to point south. Recently released data suggests that institutions are not participating, rather it’s a retail rush to get in and buy. As I pointed out yesterday insider selling started to spike up in January and we are seeing retail buyers rushing in and the rally is showing signs of deterioration.
This does not mean the rally is over. As we saw again yesterday, the first tiny dip was bought yet again and earnings results do not seem to matter. Who cares about $DB or $IBM, or $C or $GS. Keep buying. As someone who wants to sell this rally one does benefit from being tactical and that’s what I did yesterday by covering my large $ES short for a 10 handle profit, only to resell it again higher.
I maintain that I do not want to long this market here as the evidence shows me that reality can change direction rather quickly. The difficult part here is that we still continue to see intermittent rallies, overnight futures levitation, and relentless buying in certain pockets and I want to play this opportunistically like the $GS long trade yesterday. Take a look at the chart to the right however: The $SPX versus $IBM before the blow-up last night. Structurally very similar. Double Top, with a retrace and re-test. Now $IBM is opening near its 50MA. All it took is one handshake with reality. That does not mean that $SPX will act the same way today or tomorrow, but the 2000 analog certainly shows that it could drop quickly at any time. My view remains that the fundamental story will realign itself. Exactly how, when and how quickly this will unfold will remain the mystery that we will aim to trade to our benefit.
$GS: Dropped $8 to 50MA
$IWM: On buy autopilot
$TSLA: MoMo on promises