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NEWS: S&P 500 extends decline to 2% April 03, 2020 at 05:18PM

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The S&P 500 is at the lows of the day
The 38.2% retracement held at the start of the week and that’s the dominant feature on the chart. As for support, the weekly low of 2447 is about 1% away and will be the spot to watch if declines accelerate.

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S&P 500 Companies Have Reduced Share Buybacks 25% From Last Year

Nearly 50 companies in the U.S. have suspended stock buyback plans, and more could be coming.

Bram Berkowitz
Bram Berkowitz

(TMFBram)
Apr 3, 2020 at 2:00PM
Stock buybacks, a key lever for increasing shareholder value at many companies, have been on the wane during the coronavirus pandemic, and a new study gives details.Nearly 50 companies across the U.S. have suspended plans to buy back shares in order to preserve cash for what could be coming down the road, Goldman Sachs estimates.

The firm’s research department said that roughly $190 billion in stock buyback plans have been cut by S&P 500 companies, or roughly 25% of last year’s buyback total.

Buybacks

Image Source: Getty Images

“Reduced cash flows and select restrictions mandated as part of the Phase 3 fiscal legislation suggest more suspensions are likely,” Goldman Sachs strategists wrote in a note to clients, according to Financial Advisor. “Higher volatility and lower equity valuations are among the likely consequences of reduced buybacks.”

In a buyback, companies purchase their own shares from the market, reducing the amount of outstanding shares in circulation and thus increasing the value of each remaining share.

The decrease in stock buyback plans is a huge hit to future shareholder value.

Stock buybacks by U.S. firms made up about 70% of cash returned to shareholders in the year ending June 2019, according to Morgan Stanley. In Europe, where companies returned about $100 billion in cash through buying back shares, it accounted for roughly 30%.

“The problem for the U.S. equity asset class is that it began the downturn so overvalued at a record high valuation to sales,” Chris Wood, global head of equity strategy at the investment banking firm Jefferies, wrote in a note to clients last week. “The other problem is that the leveraged share buyback game has ended, which also means an end to the phony earnings growth it produced.”

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Betting The S&P 500 Falls Further

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Reading The Markets
Using fundamentals, technical charts, and options to find the next move
Summary

Traders are betting that the S&P 500 falls from current levels.

The technical chart suggests the index falls to around 2,270.

The VIX is likely to decline, along with the S&P 500, sending a false positive.

Looking for a helping hand in the market? Members of Reading The Markets get exclusive ideas and guidance to navigate any climate. Get started today »

Recent trades in the options market are suggesting that the S&P 500 declines from its current levels over the next several weeks. The bets in the options market are in agreement with the technical view that the S&P 500 may fall back to around 2,270. It likely means that the S&P 500 isn’t finished falling, and that environment remains full of risks.

One reason why the options may be suggesting the S&P 500 continues to decline would be due to the obvious, the deterioration of the economy, and because technical trends are very weak. At this point, with the absence of hard earnings results, traders are using what little information they have to make investment decisions.

Traders Betting The S&P 500 Declines

The weak employment outlook could be one reason why traders have been betting that the S&P 500 continues its decline in the weeks to come. On April 2, the open interest for the May 15 S&P 500 2,000 strike price puts rose by nearly 13,000. The data shows that the puts were bought on the ASK for roughly $48 per contract.

Meanwhile, on April 1, the S&P 500 e-mini 2,465 puts for expiration on June 30 increased by nearly 27,000 contracts. Like the other put options, these contracts were also bought on ASK for roughly $155 per contract.

In both of these cases, the traders are making a bet that the S&P 500 declines over the next several weeks from its current level around 2,500 on April 2.

Technical Take

The technical chart shows that the index has a strong downtrend in place, that is acting as a level of resistance. Until that downtrend is broken, the S&P 500 is likely to continue to decline. But more importantly, there is a big gap that was created around 2,280 on the index when the market jumped higher following the big downdraft in March. Now that giant gap could be the next target for the S&P 500 to fall to in the weeks ahead. Additionally, the relative strength index is trending lower as well, and it too suggests that momentum in the S&P 500 is pointing to lower levels.

Volatility To Remain High

Meanwhile, the VIX index remains at elevated levels, currently around 54. That reading suggests that uncertainty in the equity market is high. Additionally, it indicates that investors expect the recent uptick in volatility over the past month to remain. As a general rule of thumb for a rough estimate, taking the VIX and then dividing that number by 16, indicates that the VIX is pricing in a roughly 3.1% daily move in the S&P 500 over the next 30 days.

It means that the VIX and the S&P 500 can fall in the weeks ahead, and it may not be a sign that the market sentiment is improving. It would merely mean that the options see the daily fluctuation in the S&P 500 as a decline. For example, if the S&P 500 started to trade within a 2% daily range, the VIX could fall to around 32.

Jobless Claims Surge

One reason for the negative outlook is bad economic data. On April 2, initial jobless claims rose by 3.3 million for the week ending March 28 to 6.6 million. Based on the report issued by the Department of Labor, it marks the highest seasonally adjusted initial claims in the history of the report. These numbers are only likely to rise in the weeks ahead as some states like New York have yet to see a significant surge in the number of unemployed. For example, this week, NY only saw the number of unemployed increase by 286,000 to 366,000.

According to a report, NY saw its unemployment hotline increase by 16,000% to over 8 million incoming calls just last week, up from an average of 50,000. The same report noted that the state’s website saw 3.4 million hits over that same period.

While it is highly probable that many repeat visitors were reaching out to New York state. It seems highly likely that there still many people, just in NY, that are likely to be added to initial jobless claims in the future, given the severity of the coronavirus outbreak in that state.

Risks

There is a lot of risk in the market currently, mainly because of all of the volatility making directional bet dangerous, such as the bets that mention the options trades. Additionally, despite the technical chart pointing to lower levels in the future, it doesn’t mean it will last. Should the S&P 500 break the downtrend, it could easily result in the index rising to around 2725.

The biggest challenge for the S&P 500 will continue to the onslaught of negative economic data that is likely to continue to come out over the next several weeks. The big question is if the market has priced in all the pain that is about to unfold, or if things will be much worse.

If you need help during this time of market turbulence or have questions, please try my Seeking Alpha Marketplace service Reading The Markets

I also provide members with a Google spreadsheet which includes a view into my earnings model for the S&P 500. One of the most popular features I now offer is the ability for you to view all of my charts on Tradingview. So if you want to see my current chart of Amazon or any of your favorite stocks I have may written about, that chart would be available to you.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

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