Thoughts

1. April was probably the stock market’s bottom. Momentum became very oversold in April.
2. The road to a new all-time high won’t be easy. It’ll probably take at least a month.
3. Buybacks are still far below 2007-levels. Not a sign that the equities bubble today = the equities bubble of the 2000s.
4. The stock market usually goes up when the Fed is hiking rates.

2 am: April was probably the stock market’s bottom. Momentum became very oversold in April.

Weekly momentum indicators are useful for predicting medium-term turning points in the stock market. The S&P 500’S 14 weekly Stochastic became very oversold in early-April 2018. Except for 1 case in 2011, this was a medium-term bullish sign for the stock market.

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1 am: The road to a new all-time high won’t be easy. It’ll probably take at least a month.

The Russell 2000 (small cap stocks) is approximately 0.5% below its all-time high, whereas the S&P 500 (mid/large cap) is approximately 5% below its all-time high. (In other words, small cap is leading mid/large cap).

When this happened (historically), it took the S&P 500 at least 1 month (21 trading days) to make a new all-time high. This means that the S&P won’t rally straight away to new all-time highs: it’ll make some pullbacks along its rally.

This is logical. If Russell (small cap) is leading the rally, then it’ll eventually hit a resistance somewhere and lead the S&P 500’s pullback.

1 am: Buybacks are still far below 2007-levels. Not a sign that the equities bubble today = the equities bubble of the 2000s.

Permabears love anything that resembles 2007 (the start of the last bear market). That’s why they’re pointing to this estimate:

The nominal value of corporate buybacks in 2018 will probably = the nominal value of corporate buybacks in 2007

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But once again the permabears make 3 simple mistakes:

1. The nominal value of corporate buybacks is meaningless. Real (inflation-adjusted) buybacks are still 20% below their 2007 peaks.
2. Corporations are making much more money today than they were in 2007. The stock market’s capitalization is much higher today than it was in 2007.
3. There is nothing inherently evil about corporate buybacks.

In fact, buybacks as a % of market cap are not even close to 2007-levels.

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1 am: The stock market usually goes up when the Fed is hiking rates.

Contrary to popular belief, the stock market usually goes up during a rate hike cycle. We demonstrated that in a previous study. You can also see it in the following chart.

Notice how the stock market goes up more often than it goes down during a rate hike cycle. This is inherently logical. The Fed usually hikes rates when the economy is growing. A growing and improving the economy is bullish for the stock market.