Another “Inconvenient Truth”: Market Tops Are Violent Inflection Points After All

Over the course of the last few days, bulls’ enthusiasm has hit the proverbial brick wall, as stocks have reeled lower in an apparent rerun of the near record plunge observed at the beginning of February. But fear not: following up on Goldman’s prediction from last week that stock buybacks are set to soar over 20% this year, rising to a record $650BN 2018, this morning JPMorgan decided to double down, and forecast an even more ridiculous amount of 2018 buybacks: a whopping $842BN, or just over $70BN per month.

It goes without saying that such massive amoounts a price indiscriminate, debt-funded purchases of stocks would do miracles for prices, which then brings us to the good news.

As Nomura’s Charlie McElligott writes, we are currently back in the “low buyback seasonality” period, as the ammo spent coming out of the earnings blackout (when the market was tanking and corporates were gobbling shares) typically again slows ahead of more buying coming back online in the month-ish period prior to Q1 earnings. So in that case, expect buybacks to again pick-up in another week or two into the blackout kick-off mid-April. 

This as always will help “stop the bleed” and reverse the macro-driven market from a flow-perspective, which then calms into the constructive “micro” of “earnings calm.”

In other words, while retail investors may be running on fumes, and institutions continue to be better sellers than buyers, it will be corporate repurchases that save the market once again, as the following chart from UBS shows. 

Now the bad news.

As McElligott also points out, discussing “a super interesting analog” run by his Nomura colleague Anthony Antonucci regarding a theoretical ability to pinpoint prior market tops, “essentially what the below is “proving-out” is that contrary to the recently-heard narrative that markets fade and churn at highs before grinding lower, with folks saying there is “no real violence” at the inflection-point—Anthony’s data shows something very different.”

What the table above shows is the following:

The 1-week move on average on a lookback is -2.3% (versus this current selloff at -3.9% through the same period); the 2-week-out move sees a recovery nearing back towards ‘flat’ -0.7% on avg (with this selloff trading back to the exact same -0.7%); then the 1-month move gets very sloppy at -5.2% on avg (with this selloff’s 1m selldown at -3.2%); and finally the 3-month really gets murky -9.6% on average (as we currently at just 5-weeks out sit -6.8%).  Some stuff that is “rhyming” here…

In other words, market tops are indeed violent, and as a reminder, we just had the most violent month in many years. Naturally, it will be up to the price action over the next few weeks to determine if we continue with the downward slope, validating the “market top” formation, or whether the abovementioned buyback frenzy will once again save stocks from an ugly encounter with gravity.