— Northy (@NorthmanTrader) February 10, 2015
Stunning. But true. And the implications: QE never ended. Buybacks have replaced QE has the primary contributor to keeping the rally afloat. Consider these facts:
..more than $6.9 trillion of them since 2004, according to data compiled by Mustafa Erdem Sakinç of The Academic-Industry Research Network. Over the past decade, the companies that make up the S&P 500 have spent an astounding 54 percent of profits on stock buybacks. Last year alone, U.S. corporations spent about $700 billion, or roughly 4 percent of GDP, to prop up their share prices by repurchasing their own stock.
$700B, with no end in sight of course as we see massive buyback announcements ongoing and companies loading up on debt. Financing is as cheap as ever and it makes sense for companies to do it. It’s a huge bonanza for shareholders and executives. And it is the primary driver of price expansion and will continue as long as they do it. Once it changes price will disappear:
But this is key to understanding the current trading environment. Price is purely a function of supply and demand and not long term value. Hence ultimately I want to be an aggressive seller of any liquidity spike higher. It remains a castle built on the sands of debt:
And in real terms even the price expansion remains a mirage:
The take away: The growth of debt exceeds the growth of fundamentals:
And this speaks to the core of the question how this is ultimately sustainable. We can’t know, but we can observe that all debt problems are pushed to the side as inconsequential. CNBC says so:
Maybe. But we won’t know until it actually happens. For now markets are complacent in their narrative.
In the meantime we saw a little glimpse of reality coming from a guest on CNBC outlining the reality of real economic expansion. A clip worth watching:
For now none of this matters, but the cumulative structure tells me that there is massive risk to the downside that continues to be masked by the current managed supply demand equation.
Yesterday’s rally shows how strenuous the demand part of the equation is right now. Price was principally managed by false rumors (Greece is saved) and buybacks who push select high cap stocks higher on very low volume. On the surface it appears large break-outs are on the verge of happening:
But in some cases they haven’t happened yet as we remain below Friday’s highs:
Again internals point to a broadly unsupported rally with no evidence of expansion taking place:
And frankly that’s why I didn’t like yesterday’s rally at all and flipped short again near the end. Now this doesn’t mean downside is immediately coming. The analog still however offers this prospect today and tomorrow, but as I said this weekend, sellers are running out of time. No matter how weak this all looks, buybacks are pushing the big boys higher. This may all turn out to be a giant trap, but we may also see the 2080/85 $SPX gap fill first.
For now bonds have been selling and giving yields a bounce, but as the $TNX chart shows, for now it may just be a bounce back to test the broke trend line:
Bottom line: We are about to see a break-out or a massive failure. The internals are currently saying there’s nothing of substance pushing prices higher, yet we also know stops are above and as long volume is low these stops may well get run causing a capitulary spike.
As we saw yesterday any news flash, real or not, can cause a massive and sudden run of stops. Fake or not, it’s enough to give algos license to run wild in a low volume environment. Tomorrow is Thursday the week before OPEX, this gives us an opportunity to see new lows this week.
Much will frankly depend on what happens in Europe. The #DAX still offers the possibility of a solid retrace on a break below 10,600, but above 10,800 this set-up will vanish as well:
Mella sees clear signs that any push higher may be sellable. If we push higher my focus will be to sell the gap fill in the 2080-85 area. For now I remain short here with flat stops in place. Nothing easy about the current environment.
For now the illusion of beauty remains. All is vanity: