While CNBC and the Financial Media trumpet the markets recent breakout to new highs, the market’s internals are rapidly deteriorating.
First and foremost, REAL investors have actually been fleeing the market in droves since the start of the year. This has NEVER happened before since stocks went truly vertical in late 2012.
Put simply, money is now actively flowing out of stocks. This combined with recent statements from TD Ameritrade’s CEO that retail investors are “all in” suggests, that there is little if any buying power in the markets from individual investors.
This drop in equity flows also coincides with a drop in EPS (Driven by stock buybacks), which we have been tracking for some time.
Remember, that corporations have been juicing EPS by issuing stock buybacks (by reducing the number of shares outstanding, the amount of earnings per share increases). And with corporate cash levels now having fallen to levels not seen since 2007 (13%) it’s highly likely that EPS will be trailing off even faster going forward as corporates have less money available for buybacks.
Thus, two of the biggest drivers of stocks (investors and corporate buybacks) already are or will be fleeing the market shortly.
This leaves the Fed as the primary market prop.
The Fed is no longer engaging in QE. It does provide the usual options expiration money pumps to help Wall Street shred options contracts… but this is just once a month. Without an active QE program, the Fed cannot pump billions of Dollars to Wall Street on a regular basis.
This leaves Fed verbal intervention as the sole market prop.
Because of the raging bullishness of investors, the Fed has been able to use effectively verbal interventions as market props in the past.
Consider last October when stocks were collapsing. At that time, St Louis Fed President James Bullard said that the Fed cannot “abide” the drop in inflation expectations and suggested putting off the end of the Fed’s remaining QE program.
At this time the Fed has less than $5 billion in QE left… putting an amount that small off was negligible. To top if off, Bullard was a NON-voting member of the Fed board… so his views were largely irrelevant.
And yet, his comments saved stocks… kicking off a move that has resulted in a 15 rally:
However, verbal interventions only work when the Fed has a carrot of some kind to dangle for stocks. The markets already know a rate hike isn’t coming until December at the earliest… so the Fed has little if anything to incentivize traders to buy.
Put simply: the market is quickly running out of props. Eventually we’re going to get a correction. But with so little buying power in the markets that could correction would very easily become a Crash.
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