Here Is When Stock Buybacks Turn On and Off – Mike Swanson (03/18/2019)

If it wasn’t for companies borrowing money to buy their own stock the stock market would not be where it is right now. Stock buybacks hit a record trillion dollar last year and if it wasn’t for them the market would not have gone straight up in 2017 and would have fallen much worse than it did going into last Christmas.

And the market might even be falling right now without them, because they are near a record in this first quarter while stats from online brokers show that Americans are selling more individual stocks so far this year than they are buying. What they are doing is selling their stocks and throwing the money into ETF’s. I believe probably they got mad at holding on to laggards like FB and AAPL that dumped hard last year and have not rallied up as fast the market. So they feel forced to get out and buy SPY to keep up and many are actually putting the money into bond ETF’s too, which have all had big rebounds.

The stock buybacks are making up for the selling these people are doing so far this year in individual stocks.

What you may not know is that there are periods of time in the markets when these buybacks turn off, because they are not allowed. This happens in the so-called “quiet period” in the four weeks going into a company’s earnings release.

This is when insiders are not allowed to buy or sell their own shares and aren’t supposed to talk to the media or analysts about what is happening with their companies. It’s all to prevent insider trading, but during this time share buybacks are not allowed either.

This has created a buying vacuum at times in the stock market going into quarterly earnings seasons.

On this chart I have put blue arrows at the start of the corporate earnings announcement periods and circled the time of the quiet periods.

As you can see in the last four “quiet periods” in which no corporate buybacks took place the stock market fell into earnings season. The exception is January 2018 when the stock market was simply going straight up.

There were pullbacks in 2017 too, but they were so minor you can barely see them. 2016 saw small dips too, but 2015 was fascinating because for most of the year going into the Fall the market traded sideways and would dip and hit support during the quiet periods and then bounce during earnings over and over again drifting into a nasty Fall stock market drop.

The next earnings period starts in the middle of April so after this week most companies are going to be going into their quiet periods and the buybacks will turn off.

Don’t be shocked if after this week we don’t see the S&P 500 dip back down into mid-April, probably to support on its 50-day moving average and then towards its 1/3 retracement level of the December low and recent high around 2643.

Are buybacks good for companies? Many companies take on massive amounts of debt to do them (that’s why they exploded when the Fed took rates to zero and began QE bond buying programs in 2015), so they are really only as good as the market is good. Once the big trend in a stock is down the buybacks turn into a disaster.

For instance take a look at GDEN, which is a casino stock I shorted two weeks ago. The company owns the Stratosphere in Las Vegas and other casino properties across the country and in the surrounding Vegas area.

It crashed on Friday when it reported bad earnings.

I am still short this stock and on Friday the CEO did an earnings conference call and said the following about his buyback program:

“Our Board recently approved a new $25 million share repurchase program, which replaces the previous $25 million repurchase program authorized in November. On the previous program, we spent $19.6 million to repurchase 1.2 million shares of our common stock at an average price of $16.06 per share.”

So, in other words, he wasted close to $20 million dollars in the last quarter on buying shares of company stock that have now crashed. And the company went wild doing this all of last year.

Now take a look at the insider selling the GDEN board members have been doing.

Here is the thing the CEO and board members have dumped tens of millions of worth of their own shares in the past year and a half. All the share buybacks they made their company do were at higher levels than where the price closed at on Friday. The buybacks failed in making the stock go up, but they did help the stock trade at higher prices for longer than it would have without them through 2018 – which enabled the board and CEO to make tens of millions of dollars dumping their own shares and laugh all of the way to the bank.

As they used their company’s money to buy its own stock they sold!

This is what corporate share buybacks are really about.

The buybacks temporarily turn off during quiet periods and then for good AFTER a company’s revenue growth flattens out as to keep doing them at that point means completely blowing the balance sheet. Of course some CEO’s do that anyway to just PUMP and DUMP.

I’m not telling you to short GDEN as it already crashed.

What I am telling you is that if you are looking to buy SPY I’d just wait for a dip at this point, because we’re probably going to get one going into mid-April after this week as the buybacks turn off.

Frankly, it’s going to be tough to trade SPY and the popular fad stocks like FB and AAPL at this point.

Most traders making it in this market are now doing something else.

Personally, I’m not trying to trade or time the S&P 500, but am shorting weak stocks with a portion of my money and going long in strong sectors.

I’m acting more as a hedge fund and focusing on this in my private Power Investor Group.

And you can also use other trading strategies to make money in a market like this too.

For example, Jeff Bishop is a super-smart options trader and instead of just playing SPY or being an AAPL bagholder (research how many shares the CEO sold last year) is killing it in options.

Jeff quietly built a valuable reputation among serious traders for his uncanny ability to consistently score double, triple… even 4x digit returns with options!

He’s now sharing his options strategy in a book you can grab here.

-Mike