Headlines
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Companies pull back on buybacks while issuing more shares:
In recent months, companies have pulled back drastically on buying back their own shares. At the same time, they've been adding to supply by issuing new shares either through IPOs or secondary and add-on offerings. This is one of the most drastic changes in supply in 20 years.
Earnings surprises trigger quick upgrades:
So far, this is shaping up to be one of the better earnings seasons in 20 years, with a high percentage of S&P 500 companies beating their earnings estimates. As a result, more companies are upgrading their financial outlooks, and Wall Street analysts are upgrading price targets and future earnings estimates.
Miners continue winning: Gold miners continue their winning ways. Every one of them has been above their long-term 200-day moving averages for a week straight, not something we've seen often over the past 25 years. According to the Backtest Engine, this has happened on 39 other days, and the NYSE Arca Gold Miners Index added to its gains over the next two weeks after only 6 of those days, averaging a return of -4%. The metal, and especially the miners, have had a very difficult time holding onto gains in the face of optimism over the past decade, so a continued rally would be a sure exception to historical precedent.
NOTE: The Daily Report will not be published on Wednesday, as I will be dealing with some family health issues.
Bottom Line:
- Weight of the evidence has been suggesting flat/lower stock prices short- to medium-term again; still suggesting higher prices long-term
- Indicators show high optimism, with Dumb Money Confidence recently above 80% with signs of reckless speculation during what appears to be an unhealthy market environment, historically a bad combination
- Active Studies show a heavy positive skew over the medium- to long-term; breadth thrusts, recoveries, and trend changes have an almost unblemished record at preceding higher prices over a 6-12 month time frame
- Signs of extremely skewed preference for tech stocks neared exhaustion by late June, especially relative to industrials and financials (here and here)
- Indicators and studies for other markets are showing less consistent forward results, though it's not a great sign for Treasuries that hedgers are net short and optimism on metals has become extreme, with "perfect" breadth among miners
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Smart / Dumb Money Confidence
Smart Money Confidence: 38%
Dumb Money Confidence: 74%
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Risk Levels
Stocks Short-Term
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Stocks Medium-Term
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Bonds
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Crude Oil
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Gold
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Agriculture
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Research
BOTTOM LINE
In recent months, companies have pulled back drastically on buying back their own shares. At the same time, they've been adding to supply by issuing new shares either through IPOs or secondary and add-on offerings. This is one of the most drastic changes in supply in 20 years.
FORECAST / TIMEFRAME
None
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The rally in stocks during the spring combined with a thirst for liquidity drove many companies to issue new shares to the public, where they had a ready audience. At the same time, they pulled back on some unnecessary expenses, like buying back their own shares.
As Marketwatch notes, this has created a situation where the market is forced to choke down a lot of supply. New shares are being created through IPOs and secondary or add-on offerings, and fewer shares are being retired through buybacks.
While Bloomberg data differs somewhat from other sources, we can clearly see the jump in offerings. From May through July, there was $140 billion in IPOs and other offerings. As a percentage of the U.S. stock market, it was the most in 8 years.
At the same time, buybacks have dried up as companies try to conserve cash without firing employees, cutting their dividends, or hamstringing their research and development budgets.
Theoretically, a combination of heavy buybacks and low offerings should be positive for stocks, since it would reduce supply. And few buybacks combined with heavy offerings should be negative.
But theory doesn't often play out in auction markets, and this is no different. Companies often increase their buybacks at precisely the wrong times, after shares have already rallied, and they pull back during times of crisis when their shares are cheap.
The chart above takes the total amount of buybacks as a percentage of market value and subtracts the total amount of share offerings via IPOs and add-ons. The higher the number, the more positive it should be for stocks. That wasn't the case - we saw high numbers right before market declines in 2007, 2012, and earlier this year.
The opposite scenario, where we are now, wasn't as clear-cut. Generally, these occurred after declines and before rallies, but it was not consistent.
The biggest takeaway is just a caveat about reading too much into the buyback vs offering theory of share supply. It sounds like this should be negative for stocks here, but the evidence doesn't give that a lot of support. If anything, we might say that companies got too pessimistic with their buybacks and that might actually be a positive. We already saw in May that a surge in offerings has not been an effective negative for stocks. Overall, it doesn't appear to be much of a reason for worry.
BOTTOM LINE
So far, this is shaping up to be one of the better earnings seasons in 20 years, with a high percentage of S&P 500 companies beating their earnings estimates. As a result, more companies are upgrading their financial outlooks, and Wall Street analysts are upgrading price targets and future earnings estimates.
FORECAST / TIMEFRAME
None
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Despite fears and pessimistic projections, corporate earnings are turning out to be okay. Now, companies and Wall Street are both expecting them to get even better.
With about 325 companies in the S&P 500 reporting their Q2 earnings, more than three-quarters of them have beat what Wall Street estimated they would earn. This would be one of the better earnings seasons in more than 20 years.
Through approximately this many days in reporting season, this quarter's beat rate ranks 16th out of 91 reporting seasons. After other quarters when reporting was going very well, stocks struggled a bit shorter-term then did very well over the next 6-12 months, thanks to most of them occurring in the past decade.
As a result of the positive surprises, companies are upgrading their financial outlooks to the largest degree in at least 20 years.
Wall Street is seeing that, and raising. In the past decade, they've never raised the future earnings estimates of companies they cover in the S&P 500 at a faster rate than they're doing now.
They're also raising price targets.
About the only precedents for what we're seeing now is the jump in upgrades in the spring of 2012 and early 2018. Generally, after extremes in these series, future returns were worse than average. The more optimistic Wall Street got, the lower the future returns in the S&P 500.
It's entirely possible that since we're recovering from one of the biggest hits in generations, we can't rely too much on these technical and fundamental upgrades as much as we could in the recent past. As much as we can, though, it's a minor warning that sentiment on the Street has rapidly changed from deep pessimism, and it has been a pretty good contrary indicator.
Active Studies
Time Frame | Bullish | Bearish | Short-Term | 0 | 1 | Medium-Term | 8 | 11 | Long-Term | 46 | 1 |
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Indicators at Extremes
Portfolio
Position | Weight % | Added / Reduced | Date | Stocks | 29.8 | Reduced 9.1% | 2020-06-11 | Bonds | 0.0 | Reduced 6.7% | 2020-02-28 | Commodities | 5.2 | Added 2.4%
| 2020-02-28 | Precious Metals | 0.0 | Reduced 3.6% | 2020-02-28 | Special Situations | 0.0 | Reduced 31.9% | 2020-03-17 | Cash | 65.0 | | |
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Updates (Changes made today are underlined)
After stocks bottomed on March 23rd, they enjoyed a historic buying thrust and retraced a larger amount of the decline than "just a bear market rally" tends to. Through June, there were signs of breadth thrusts, recoveries, and trend changes that have an almost unblemished record at preceding higher prices over a 6-12 month time frame. On a shorter-term basis, our indicators have been showing high optimism, with Dumb Money Confidence recently above 80%, along with signs of reckless speculation during what appears to be an unhealthy market environment, historically a bad combination. While there are certainly some outlier indicators that are showing apathy or even outright pessimism, a weight-of-the-evidence approach suggests high risk over a multi-week to multi-month time frame. I've been carrying a low (too low) level of exposure to stocks, as well as bonds and gold. I don't see a good opportunity to add to any of those currently, with poor prospects pretty much all the way around. As worried as I am over the medium-term, I would only grudgingly reduce my exposure even further given the longer-term positives we spent so much time discussing in the spring. At this point, I would only look seriously at lowering exposure further if the S&P 500 drops below approximately 3220, an initial sign that its recent mini-breakout had failed.
RETURN YTD: -3.3% 2019: 12.6%, 2018: 0.6%, 2017: 3.8%, 2016: 17.1%, 2015: 9.2%, 2014: 14.5%, 2013: 2.2%, 2012: 10.8%, 2011: 16.5%, 2010: 15.3%, 2009: 23.9%, 2008: 16.2%, 2007: 7.8%
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Phase Table
Ranks
Sentiment Around The World
Optimism Index Thumbnails
Sector ETF's - 10-Day Moving Average
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Country ETF's - 10-Day Moving Average
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Bond ETF's - 10-Day Moving Average
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Currency ETF's - 5-Day Moving Average
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Commodity ETF's - 5-Day Moving Average
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