'Stalemate' shuffling prevails around the S&P's 200-Day Moving Average. In a sense this stabilization is welcomed, and in a sense it's treacherous as it is so visible to every trader. It's degree of very short-term uncertainty against the longer-term potential is nebulous to a degree, while we do contend that a near-term low should unfold as we approach 'The Ides of March'.

Freepik

It's a 'process', and there is no change in our stated view of February being a roller-coaster defensive market, after the projected 'January Effect' relief rally. The debate a bit further out is less about the Fed hawkishness (that's a factor as many believe the Fed does 'not' care as much about the market as Wall St. believes they do), and more about both geopolitics and technical behavior as or if we get a solid move below the 200-Day, as broadly discussed last week.

For sure the bears expect defensive or even breakdown action into the Spring whereas I believe there's more to this outlined 'process', but the goal is setting up the prelude to a Spring rally, not playing for any sort of extended decline.

By the way, not terribly pertinent, but the argument that 'buybacks are a gift to the wealthy insiders' is not an literate argument. Supporters contend buyback decisions are a poor allocation of funds, and there I agree that this varies with margins contracting and EPS contracting, and then 'in a big company' doing a buyback steadies price. That I understand. Warren Buffet used to have 'rules' about margins and value, and suddenly he's endorsing buybacks? Mostly it's because of tax and activist counterattacks, and executive compensation.

That was my view since 2021's buyback-binge as the rest followed-on. By the way it was restricted if not actually illegal under some conditions until 1982. In a sense CEO's also do it to fund equity recovery in their stock, sometimes via bond offerings, and that of course contracted as interest rates rose last year. I note it was previously in-vogue to do it in 2007, which sort of masked troubles coming from real estate investments many of the same firms were doing then.

Notice Buffet's 'letter' failed to note tremendous 'insider selling' that transpired after the buyback pushes expired. This is one area where I could say I agree with President Biden, who agreed with my own view of these anti-dilutive buys of stocks pleasing shareholders (including me when Chevron did it), but that's a bit different when a company that is still in a growth-mode does it. Also 'free' money back in 2021 encouraged the buybacks, often with bond issuance. Not the case now of course, so generally you have few buybacks, politics or not.

There's a reason Buffet and most pundits today endorse buybacks. It allows benefiting from appreciation, and that includes funds, from share-price rises. However it ignores artificial price levels sometimes setting-up subsequent real shakeouts greater than would occur otherwise. This aspect was not discussed by Buffet or the 'analysts', and was a characteristic of the 2021 reversal and a big-cap bear market continuation last year. It was (in our view) a prime reason behind it (artificial rally and insider selling ensuing) which they largely ignored.

In-sum: 

There's no impressive indication of growth in earnings or even peace in Europe, actually could be the opposite but that's an impossible assessment just now. Valuation metrics would be assisted by a further breakdown, and as the market 'grinds' with a possible 'last stand at the OK Corral' forthcoming (I refer to the 200-Day Moving Average). Any subsequent purge would help lots to restore value along the road to a probably Spring rally down the line. That presupposes the Sheriff isn't shot and then recovery becomes 'pending'.

We'll see. Probably Tuesday morning will be 'gunfight at the OK Corral', and it may be more sequences than just a single exchange encounter.

So, risk-reward for stocks isn't that great, but JP Morgan's warning (from Marko Kolanovic) to 'fade the bond-equity divergence' is logical based upon the valuation levels for the S&P. However, much of that is 'in' the market and you have a majority of under-invested money managers who are dancing with 'how to' questions regarding their holdings and (lack of) performance in 2023.

No doubt it's a tricky year. But it comes in the wake of a two-year bear market that was masked by the very 'buyback binge' that Warren Buffet (surprisingly) defended in his annual letter. These managers have tried to avoid problems by focusing on defensive and dividend stocks, and generally got nowhere.

For the most part few investors or managers have achieved much overall and oddly that may be something that limits downside in S&P 'for the moment'. I'm sure allowing for a break of the 200-Day Moving Average, but suspect it leads to a sharp (if temporary) rebound. So far all S&P's doing is hovering over it.

Bottom-line: 

S&P gap-up, sold-off gradually and finished defensive even with the Indexes a bit higher. Proximity to breaking (or again fiddling with) S&P 200 DMA remains, and would still likely trigger a washout and 'automatic rally' as a snap-back, whether such rebound would be sustainable (or likely not very).

I remain 'aggressively neutral', and believe this process remains incomplete. It is a market of landmines with few goldmines, and valuation metrics remain on the poor side for most big-caps, although that's been the case for a long time.

More By This Author:

Market Briefing For Monday, Feb. 27
Market Briefing For Thursday, Feb. 23
Market Briefing For Wednesday, Feb. 22