More Than One Way to Skin a Cat

SPX and ES came within 2 points of their SMA200s on the opening yesterday.  They were on their way for another try (the yellow arrow) at 10:30 when EIA’s crude inventory report was released.

It was a surprise build, meaning there was more oil sloshing around than folks expected.  According to fundamental analysts who pay attention to things like supply and demand, this should have sent prices tumbling.The tumble lasted all of 15 minutes, at which point WTI popped back above its SMA10, where it struggled to remain the rest of the day.

Stocks aborted the SMA200 run, and spent the remainder of the day in recovery mode.  In the low-volume after-hours, ES managed to claw its way back to the H&S neckline it fell beneath on Tuesday — a backtest.Backtests are funny things.  In a fair and orderly market, they are normally the kiss of death — the last ditch, but failed effort of a stock to regain solid footing.  Traders know this, and so do corporate executives tasked with maximizing shareholder value (and incentive comp.)

Take Facebook, for instance.  This former investor darling has been under the gun, lately.  It plunged below its SMA200 in March, completing a H&S Pattern that targeted 140.  But, it announced better than expected earnings yesterday.

Unfortunately, this didn’t move the needle.  The stock bounced around UNCH to +1% for the first 30 seconds or so.  Moments after CNBC’s Julia Boorstin uttered the words “an additional share repurchase program of $9 billion,” however, the stock was off to the races.  See if you can spot the turnaround.  Naturally, the overnight ramp (already making some purchases?) carried the stock up past its own neckline.  Crisis averted…situation normal…nothing to see here…please move along.

Surely it’s a coincidence that the company’s last buyback program was announced in November 2016 — in the wake of a drop through its SMA200.Whether or not you own FB shares, this is important stuff.  As we pointed out on Mar 19 [see: Facebook Flops] every time FB drops through its SMA200 (the solid red line), the S&P 500 takes a nosedive.  When it recovers, SPX recovers.  Easy peasy.As the 60-min chart above shows, FB is about to test its SMA200 at 173.84.  How’s that for holding the fate of the financial markets in your hands?

This raises all sorts of interesting questions.  If the announcement of a meaningless buyback plan (they had only utilized $2 billion of their $6 billion plan from 2016!) can signal not only an individual stock but $30 trillion in stocks to rally, what does this say about market integrity?

It says pretty much the same thing as a foundationless rally in oil, spike in USDJPY, or collapse in VIX — all of which send stocks higher on a regular basis, thank you very much. But, that’s a whole ‘nother rant.Let’s get back to buybacks and another example that’s near and dear to our hearts: Deutsche Bank.  We started following the stock in Sep 2016 at the request of a hedge fund client [see: Deutsche Bank: Will it Survive?]

We nailed the bottom, the end of the subsequent 87% bounce, and a few interim swings along the way.  Most recently, on Feb 7 [see: What is Deutsche Bank Trying to Tell Us?], we concluded it was susceptible to further weakness.

We hadn’t paid attention to DB’s buybacks, as the tea leaves had already been easy enough to read.  But, the Facebook experience made us curious, so we looked.

Unlike Facebook, DB discloses each individual transaction (the yellow arrows, below) in its financial statements.  There is obviously a strong correlation between buybacks and important support levels — particularly when the stock had fallen or was in danger of falling below its SMA200 or a channel or trend line of support.

In reality, there wasn’t one single transaction that wasn’t related to the need to prop up the stock or push it above important resistance.The point isn’t that stock buybacks are “bad” per se.  If you’re the Bundesbank, the ECB, or even an employee or major shareholder who is wondering if/when DB’s $40 trillion derivatives portfolio is going to blow up, you are probably fully in support of such activities.

But, if you purchased the stock because it recently broke out of a falling channel that saw it shed a third of its value since December, you might care to know that it probably wasn’t due to fundamentals.

On a similar note, those buying the overnight ramp job might want to keep an eye on CL and RB, which are almost certain to test their SMA10s again today.  This brings us (finally!) to today’s charts.

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