As you know last week the S&P 500 broke through it’s triangle resistance pattern that everyone has been talking about for the past few weeks.
I still like the five stocks, which include a few dope stocks, as leaders plays for the rally that I mentioned last Thursday in a post.
That means that the short-term trend is now up, but the monthly trend still remains sideways. Time will tell if that means it’s a stage one base or a stage three top.
The reality is that the stock market is now being pressured by conflicting forces.
The bearish forces including a coming trillion dollar budget deficit blowout that is causing the US dollar and bonds to fall and interest rates to rise.
In time that will activate gold.
The bearish forces include high stock market valuations too and trends that have been playing out for decades.
I did a post last week that had a series of videos by the Real News people titled The Rise of Finance and the Fall of American Business with interviews with one of the top journalists at the Financial Times that explains what all the problems are. You can listen to it by going here:
Now some people think this type of talk about possible problems as “fake news” and see last week’s rally as the start of a new move that will now take the market up for the rest of the year, but you may be wondering what fueled the rally last week.
It wasn’t really corporate earnings, because we went through most of the earnings reports going into last week and the market basically went nowhere during that time.
A few stocks such as Netflix, Facebook, and Apple gapped up and ran after reporting earnings, but most stocks actually sold their earnings news.
What really helped the market last week are two things.
First of all the stock market held support at it’s 200-day moving average going into this month with the help of technical traders and computer robots and EVERYONE was watching the triangle pattern.
And so many people bought once that triangle got broken and will keep buying until they have no more money left in their account or go on so much margin that they can’t borrow anymore.
That is basically what happened in March when the market popped and dumped.
The second thing though is massive stock buybacks.
Thanks to Trump tax cuts those buybacks have been boosted big time.
And that helped cushion the market decline when it happened and stabilize things.
In fact individual investors and foreign investors have taken more money out of the US stock market than they have put into it this year.
According to a story in The Wall Street Journal last week:
“Rising buybacks this year have been a crucial counterbalance to the rising tide of stock-fund redemptions. Investors yanked $29.4 billion out of exchange-traded funds and mutual funds tracking U.S. stocks in the first quarter, the most for any three-month stretch since 2016, according to a Bank of America Merrill Lynch report citing EPFR Global data.”
“The S&P 500 is up only modestly for the year. Yet many analysts believe major indexes would have suffered losses without the support of buybacks.”
“Corporations have long been among the biggest buyers of stocks—making their share repurchases a major contributor to the nine-year bull market. Companies seized the chance to scoop up discounted shares following the financial crisis, with buybacks topping out in 2015 at $572 billion before leveling off.”
The other week Apple made news by announcing a $100 billion share buyback in which Apple buys it’s own stock.
That helped make Apple shares go up, which in turn helped push the market averages up as Apple makes up 12.07% of the entire Nasdaq 100.
This level of buyback activity in corporate America is not going to last forever.
The one time tax repatriation benefit is a one shot deal.
But more importantly these buybacks are possible because interest rates still remain super low.
Companies borrow money by issuing bonds to do these buybacks.
So rising rates and falling bonds prices will done day cause them to an end.
And when that happens the stock market will lose this buying that has provided the real fuel for the stock market in the past few years, has helped it to recently hold support, and helped to even trigger last week’s triangle breakout.
These are the cross currents now in the stock market and what rising stock market volatility actually represents is a cross roads coming closer.
It is also creating a market that for now is still sideways for the market averages.
I actually think that makes the averages themselves harder to trade.
But it sets it up so you can find individual stocks that are breaking down on their own and falling to bet against and others that are easier to buy and make money than the averages are.
So if you have been having a tough time trading the stock market ETF’s you might want to consider focusing more on individual stocks and sectors now.
I’m personally acting more like a hedge by having BOTH long and short positions in my accounts.
There are companies that wouldn’t even exist if it weren’t for the low interest rates and borrowing costs that they have.