Buyback Blackout Period Starts Monday: Is This The Catalyst That Ends The S&P Rally?

Tyler Durden's picture

Last week, one day before the Fed unleashed a statement that stunned Wall Street by its dovishness and admission that the Fed had been far too optimistic on the state of the US (and global) economy, when it slashed its forecast on the number of rate hikes from 4 to 2, we said that "while everyone's attention is on the Fed, the biggest danger to the S&P500 has little to do with what Janet Yellen may say tomorrow, and everything to do with the marginal buyer of stocks being put into a state of forced hibernation", namely the start of the stock buyback blackout period during Q1 earnings session.

As a reminder, even Bloomberg recently acknowledged the unprecedented role corporate stock repurchases play in the current market when it penned "There's Only One Buyer Keeping S&P 500's Bull Market Alive." Of course,  our readers have known the identity of the "mystery, indescriminate buyer" for two years.

Today, it is Deutsche Bank's turn to warn about the imminent end of buybacks for the next 6 weeks. From Parag Thatte's latest Asset Allocation and Flows report:

Buyback blackout period starts Monday. An increasing number of S&P 500 companies will enter into their blackout period starting next week, about a month before the earnings season kicks into high gear in the third week of April

Deutsche Bank tries to spin it as not necessarily a source of downside:

The blackout period means a slowing in the pace of buybacks which leaves equities vulnerable to negative catalysts. However it does not automatically imply downside and as we have emphasized before it is the total demand-supply gap that is key. So flows are critical and data surprises suggest the recent flow rotation into US equities can go further

There are two problems with this assessment.

First. as DB's own chart below shows, traditionally US equity flows have seen substantial and sharp declines during the buyback blackout period during the past three calendar years. It is unclear why this time will be any different.

Second, and more important, is that as Bank of America reported earlier this week, in the latest week "during which the S&P 500 climbed 1.1%, BofAML clients were net sellers of US stocks for the seventh consecutive week. Net sales of $3.7bn were the largest since September and led by institutional clients (where net sales by this group were the second-largest in our data history). Hedge funds and private clients were also net sellers, as was the case in each of the prior two weeks, but a different group has led the selling each week. Clients sold stocks across all three size segments, and net sales of mid-caps were notably the largest since June ’09."

BofA's summary: "clients don’t believe the rally, continue to sell US stocks" and they were selling specifically to corporations whose repurchasing activity is near all time highs: "buybacks by corporate clients accelerated for the third consecutive week to their highest level in six months, which is also above levels at this time last year."

Next week this "accelerating" buyback activity ends, and the question will be whether the S&P at a high enough level to give institutional investors comfort that without the buyback bid, in fact the only bid for the past seven weeks, they should now buy on their own, or will the selling, which took place as the market has soared from its recent lows in its biggest quarterly comeback ever...


... continue, only this time with a cheap debt-funded, price indiscriminate buyer on the other side to absorb all the selling. We will have the answer in just about one week's time.

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Herd Redirection Committee's picture

Let's spice things up.  It took some effort to put this together:

Everybody Knows (by Leonard Cohen, remix by HRC)

Everybody Knows that the Rich are loaded
Everybody who rolled their short options lost
Everybody knows that the war is over
Everybody knows the good guys lost

Everybody knows the market is fixed
The poor stay poor, the rich get rich
Thats how it goes
Everybody knows

Everybody know Fed minutes are leaking
Everybody knows Grandma Yellen lied
Everybody got this broken feeling
Like the reserve currency just died.

Wallet out of the pocket
Cuz the S&P is like a rocket
Cocaine and hoes
Everybody knows

Everybody knows you love QE baby
Everybody knows that you really do
Everybody knows you've been profitable
Ah give or take a Q or two

Everybody know's Hildog's been discreet
But there were so many e-mails you just had to delete!
What does the FBI propose?
Everybody knows

Everybody knows, everybody knows
That's how it goes
Everybody knows

Everybody knows, everybody knows
That's how it goes
Everybody knows

And everybody knows that it's now or never
Everybody knows that it's me or you
And everybody knows markets rise forever
Ah when the ESF sets a VWAP algo or two
Everybody knows 666 was the bottom
The future is HFT bottin'
So tell your bros
What everybody knows

And everybody knows loss of reserve currency status is coming
Everybody knows the petrodollar won't last
Everybody knows Goldman's inside [wo]man
And everybody knows the Elites are in trouble
Everybody knows the Fed is through
Everybody knows its coming apart
Take one last look at those you mocked
Before it blows

And everybody knows.

Thanks, I'll be here all week

Ajax_USB_Port_Repair_Service_'s picture

"Buyback blackout period starts Monday"

Didn't we go through this same routine last year? And the years before?

Ajax_USB_Port_Repair_Service_'s picture

Right. Every year the same chart with a new bar added. But nothing really bad ever happens.

BullyBearish's picture

Another reason NO RATE increase last week..."market" would've absolutely crashed with increase and no buyback backstop...

pound the vix's picture

The Plunge Protection Team has kept the wheels on the bus, but a 150 point drop in the S&P the last two quarters is a significant trading opportunity if you can see it coming.

No Half Measure's picture

Um, I think it is like the seasons, there are 4 of them every year.

The Merovingian's picture

Last time I checked the blackout period doesn't affect congress critters, so we have that going for us .... /s

jakesdad's picture

silly rabbit!  laws are for muppets!

Soul Glow's picture

Tim Cook is going to be so bored without doing buybacks every other week.  Someone get him an iPhone and some hopium stat!

zeropain's picture

the peak has to be iphone 6.  and you know iphone 6 coasted on previous success.  dumb money bought iphone 6.  so only the ultra doosh of the doosh will buy iphone 7.

TradingIsLifeBrah's picture

Smaller iPhone is going to be huge, seems so stupid but many people have been complaining over the last 2 years that they want a new iPhone but do not want the bigger screen.  Laugh now, cry later if you think that the small iPhone will be a fail.  I think the stock will take off when people see it selling (the Apple Watch was never going to be a big deal, it was a fad just like VR is now).  The smaller iPhone has real demand built into it.  While Apple's stock is fairly priced around $100, expect the stock to spike up on the small iPhone sales in a few months.  It will likely be driven by shorts getting creamed and/or investors being irrational but anywhere near $100 is a good chance to build a position, methinks.  Obviously know your stop for when you will get out if the price goes down.

Stox's picture

I am one of those folks who did not trade up to the larger size.  It just doesn't work for me.  But I read the new smaller one will be a budget version with fewer features, so it may be they will screw this up.


zeropain's picture

apple chasing low end,  that's is the sign of the end

Wild Theories's picture

I hear what yer saying brah, but here's the other contrarian reminder:

Apple's new vanity headquarters is due to be completed end of this year(or maybe early next year if delayed)

and if you know your corporate history involving expensive vanity HQs and company peaks...

CPR Steps_30 pumps_2 breaths_then repeat's picture

This rally is weak, built on quicksand, watch it sink! 

kwatinhu's picture

I gotta agree, what keeps this broken down flying machine in the air is what puzzles me. All data is bullshit, all the numbers are lies, how can you make a move in an environment like this? The world is swimming in sea of oil they can't even find enough storage for and the price goes UP!!
The housing market isn't close to recovering from the last bubble debacle and the prices go UP!
What keeps this motha f#cker alive!!
Even Janet's blithering nonsense can't defy gravity this long. When does the shit storm start??

TradingIsLifeBrah's picture

I for one will be buying up on Monday in order to front run the buybacks that this article indicates will be coming in later.  Last chance to get in before S&P 2200, you heard it here first (You heard it here previously when it was the last chance to get in before S&P 2000 and S&P 2100)

The Saint's picture

Now we know why you can't afford to love New York.

phatfawzi's picture

its funny the only buyer in the market is about to take a 2 week holiday. holding large position in uvxy, here is hoping the market shits its self venezuela style. (no tp for my bunghole)

MCsBusiness's picture

Is that mean I made the right decision to short more this week?

Chad_the_short_seller's picture

Yea yea yea, we've heard a bullshit excuse or a reason the market was gonna tank every week. Guess ZH hasn't caught on that the fed is doing massive QE in order to rally stocks. The VIX doesnt' go from 50 to 13 without QE. Wake up dum dums. 

GotGalt's picture

I am one of suckers that shorted the market on Friday right at 2050 and knowing that corporate share buy backs would be muted for a month. It probably won't matter though. Yellen with help from Citadel and everybody has got this shit on lockdown no doubt. I will likely be covering my S&P short when it flies past next resistance at 2070. Oh well, it is only gambling clown bux anyways.

Thought criminal's picture

It really seems to me like they threw everything they had to get S&P back above 2050 before the march options expire and the buyback blackout starts to get rid of as many shorts as possible. Everything points towards a correction now until they come up with some new shit.