The Third-Rail For Stocks

| About: SPDR S&P (SPY)

Summary

Corporate share buybacks are restricted in the period ahead of earnings reports, but once companies have reported their results, they may begin buying back stock again.

Many of our nation's largest financial institutions have recently had expanded capital use plans approved by the Federal Reserve, and are now poised to put them into effect.

Given that many important banks have also reported relatively positive earnings news, and that the financial sector (20% of S&P 500) had previously lagged the broader market, stocks benefit broadly.

As companies generally are freed again to buyback shares, it adds an incremental support to equities that had been on their own in recent weeks.

2016 remains a year for volatility and upside is limited in my view. Investors are advised to see upcoming reports of mine on a potential disruption to this nascent run.

Stocks, as measured by the SPDR S&P 500 (NYSE: SPY), are now up 6.8% since our suggestion to buy into fear during the post Brexit sell-off. In the last several reports here, we have been listing the pillars of support currently under stocks and lifting them higher. American equities have benefited from uncertainty overseas, which has driven capital to our shores for more sure returns in our markets. U.S. stocks have also likely benefited from anticipation and expectations around earnings season, especially around the lagging technology and financial sectors. This report covers the third-rail, which I believe is helping to power stocks to higher ground today. Corporate share repurchases are allowed to start again after companies report their earnings. In one important sector, those repurchases are poised to expand, and generally, share buybacks add support to stocks. Still, you will want to stay tuned to my column, as I continue to see this year as a time for volatility, and I will share some important thoughts about that in the near-term.

Traditionally, "the third-rail" tends to figuratively refer to a danger around an issue. However, the third-rail is literally the power source for some trains, and it drives them. Thus, a third-rail of sorts that is driving stocks today is the renewed share repurchases of corporations as they are freed again to do so post their earnings reports. Such share repurchases act as a support to shares at minimum, and a lift to them beyond that.

This is especially the case for the financial institutions whose capital use plans have been recently approved by the Federal Reserve. Our major banks, including Citigroup (NYSE: C), J.P. Morgan Chase (NYSE: JPM), Bank of America (NYSE: BAC) and others have been given the all-clear to expand their share repurchase programs, and now that their earnings reports are behind them, they are completely free to begin doing so. Given that many of our biggest banks have reported relatively positive EPS news this quarter, their repurchases should come against little opposing pressure and add extra lift to their share recovery and performance.

Security Sector

07-20-16

AM Trade

SPDR S&P 500

+0.4%

SPDR Dow Jones (NYSE: DIA)

+0.3%

PowerShares QQQ (NASDAQ: QQQ)

+1.1%

iShares Russell 2000 (NYSE: IWM)

+0.8%

iPath S&P 500 VIX ST Futures (NYSE: VXX)

-2.3%

Financial Select Sector SPDR (NYSE: XLF)

+0.2%

Technology Select Sector SPDR (NASDAQ: XLK)

+1.2%

Energy Select Sector SPDR (NYSE: XLE)

-0.2%

Health Care Select Sector SPDR (NYSE: XLV)

+0.9%

Consumer Discretionary Select Sector SPDR (NYSE: XLY)

+0.3%

Consumer Staples Select Sector SPDR (NYSE: XLP)

-0.3%

Utilities Select Sector SPDR (NYSE: XLU)

-0.5%

Materials Select Sector SPDR (NYSE: XLB)

+0.0%

Industrial Select Sector SPDR (NYSE: XLI)

+0.4%

Click to enlarge

Financial sector shares have been gaining ground of late, but they remain behind the curve, lagging the rest of the market, because of expectations around the Federal Reserve's rate plans. Even so, relative valuations and these catalysts, give cause for some making up of ground here. The lagging financial sector is important to the overall indexes, at times marking 20% of the S&P 500 Index. Thus, as it gains, the market does.

Generally speaking, as companies get their earnings reports out of the way and begin supporting their shares again with share buybacks, the market finds itself on more solid ground. Without the benefit of share repurchases, stocks have been on their own, so it can be viewed as an incremental reassurance for equities.

As within my other recent reports on the market, I warn that 2016 remains a year for volatility and that upside is limited. It's an issue I have planned to discuss in detail all year long and have not gotten to (though I likely discussed it last August or September). I will cover it in detail in one of my very next reports on the market. Finally, next week presents a great challenge to the market, and I will cover that issue in my weekend report on stocks. To receive all my thoughts on the market, you are welcome to follow my column here at Seeking Alpha.

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.