US Shares Warning – 2 Things to Watch

Whilst the Aussie All Ords had its worst day in 3 weeks yesterday, US shares continue their resurgence since the big drops in January and February this year.  There are however a couple of things to watch closely if this is to be sustained.

Firstly, as Bloomberg reported below, it’s being driven almost entirely by one buyer.  The companies themselves….

“Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year.

Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.”

Thanks to the near zero interest rates available and record corporate debt takeup, US companies are borrowing to buy back their own shares and prop them up.  But this is coinciding with contracting earnings.  As Bloomberg reports:

“During the last two decades, there have been two times when earnings contractions lasted longer than now. Both led companies to slash buybacks, with the peak-to-trough drop reaching an average 62 percent.”

In other words the only buyer in town may run out of funds to buy back their own shares and thus remove the majority of market support.

The second thing to watch is the technical set up at present.  Whilst some may be taking some comfort from the recent rally, the fact is that after the August 2015 falls (see the chart below), the ensuing rally didn’t get to the previous high.  The January and February falls we just saw, formed a lower low than August.  SO, technically if this current bounce (dead cat anyone?) does not go higher than the November high we will have seen a lower low followed by a lower high.  That ordinarily confirms we are about to head down, possibly way down…