Market Brief – Tuesday 10/30/18

Stocks started out the day surging higher as investors look to “buy the dip” in stocks as the market is flashing “oversold” conditions on a short-term basis. For the past several years buying the dip has been profitable, but right now it isn’t working.

When examining trading volumes, I noticed that as stocks have sold off, investors have been selling other assets to buy stocks. Bonds, commodities and underperforming stocks are all getting sold to buy the big-name stocks. I still believe investors are facing margin calls, and rather than sell, they are buying. When investors are forced to sell their big-name stocks as the monetary base continues to fall, stocks will rapidly fall.

Stock market Bulls are looking to the expiration of the corporate share buyback blackout to boost the equity markets past their recent all-time highs, despite weaker economic data. Experts are indicating $350 billion of shares may be bought before the end of the year, but it may not be enough to boost the markets.

Corporate share buybacks are governed by SEC Rule 10b-18. Rule 10b-18 states that corporations can’t buy more than 25% of their average daily volume, that all shares must be purchased by the same dealer, that depending on the market cap of the company, shares can’t be purchased within the last 10-30 minutes of trading, and that the corporation can’t pay more than the highest independent bid of the last transaction quoted. Simply put, corporate share buybacks alone can’t drive stock prices higher unless other investors are also purchasing.

The total market capitalization of U.S. stocks is approximately $40 trillion. A $350 billion purchase is less than 1% of the total market capitalization. For the S&P 500, which has a market capitalization of $24.58 trillion as of September 2018, $350 billion represents 1.42% of the index. The remaining corporate share buybacks aren’t big enough to make a difference.

Equity bulls are rejoicing after a hard-fought battle today that saw the S&P 500, DJIA and Russell 2000 reclaim yesterday’s drop. Today’s move was more about volatility than stock prices, as volatility was on the cusp of a major move higher like what happened back in February. A repeat of February would send stock prices significantly lower as there is less liquidity in the markets now than earlier this year.

Treasury yields were down a bit on the day as investors continue to sell bonds to buy more stocks. Treasury yields have been tracking oil, which is down from its peak, indicating yields will be the last to drop to end this business cycle. With crude inventories continuing to build, Treasury yields should be moving lower.

Physical gold fell back below its 100-day moving average, while the gold miners tagged and held their 50-day moving average for the second time. Agricultural commodities fought back against sellers to close right on its 100-day moving average for the fourth time. The 100-DMA is acting as support for agricultural commodities.