US stocks to start new week little changed

Summary:

• US indices at similar levels to Friday’s close
• Goldman increases buyback estimates
• Buffet indicator flashing potentially big warning sign

US stock markets are expected to begin their session around where they ended on Friday with the US500 hovering around 2840 ahead of the open. The European morning has brought some interesting moves in stocks with a sharp move higher in the DE30 which saw the index soar almost 200 points in less than 2 hours on no real positive news. The rally has since reversed in large part, and the move now looks like a typical summer push that occurs on low traded volumes and was likely exacerbated by algos. 

 The DE30 rallied sharply higher from around 12530 to 12710 in less than 2 hours on no real news this morning. This move has since faded and price fallen back lower. Source: xStation

Returning our attention to the US and an interesting chart from Goldman Sachs, shows that the bank have increased their estimate of 2018 stock buybacks to a record $1.0T. Stock buybacks have no doubt played a key role in some of the latest moves higher, with Apple probably the most obvious example. As you can see from the chart below the forecasted buybacks this year are the highest on record and look set to eclipse those seen in 2007. Large amounts of buybacks can be seen as a contrarian signal, with 2007 obviously just preceding the global financial crisis.  

 Goldman expected a record amount of stock buybacks from US firms this year, eclipsing the 2007 record. This could be seen as a positive, with it clearly representing buying pressure for stocks, but on the other hand it may be viewed as a contrarian signal. Note that 2007 preceded the large stock market drop due to the global financial crisis. Source: Birinyi Associates, Goldman Sachs Global Investment Research. 

Another indicator, that is a long time favourite of legendary investor Warren Buffet, is unambiguous in its latest signal - suggesting that stocks are clearly overvalued. The rate of the Wilshire 5000 to GDP has been so regularly quoted by Buffet that some have chosen to name the indicator after him. The indicator attempts to correlate the relationship between all US stocks and the country’s GDP, with the view being that extreme readings should mean revert towards 100%. The previous highest reading of 136.9% came back in 200 at the height of the .com bubble but as of today, the reading is above that level at 138.0%. Now, while this is obviously taking a very long term approach and therefore shouldn’t be used to think stock will drop imminently, it does indicate just how expensive stocks are at present.   

 The ratio of US stocks to GDP is close to its highest ever level and could be seen to suggest that they are expensive. Source: Advisor Perspectives

 US500 remains not far from its record high at 2880. Possible resistance may be found at recent highs around 2848. As long as the market remains above the breakout level around 2790-2795 then the outlook remains favourable for longs. Source: xStation