As we return from the Memorial Day holiday and approach the end of May, it would appear that all of those who followed the old saying of “sell in May and go away” have been greatly disappointed so far.
The S&P 500 hit a new intraday high this week, the Dow Jones Industrial Average is threatening to reach new highs, the tech-heavy Nasdaq is recovering and even the small-cap stocks that comprise the Russell 2000 are rallying back up above key resistance.
Despite all of the nail biting and worrying many have been engaged in for the past few months, this does not look like a bearish turn in the market. That turn may still arrive, but it hasn’t materialized yet.
So, what is keeping the market afloat?
One factor has to be stock buybacks. According to CapitalIQ, S&P 500 companies repurchased an astounding $160 billion of their own stock during the first quarter of 2014 alone. During that timeframe, Apple (AAPL) was the largest purchaser of its own stock — repurchasing about $18 billion worth.
What does all of these buybacks do to stock values?
For the most part, buybacks push stock values higher. You can see this relationship play out in the five-year chart of AAPL below.
Source: Ycharts.com
During the first few years displayed on the chart, AAPL’s share price (blue line) was rising at the same time AAPL’s shares outstanding (orange line) were also rising. This was during AAPL’s heyday of dominating the smartphone and tablet market. However, in 2012, AAPL’s earnings per share (EPS, red line) started to level off and eventually started to decline in 2013. This led to a pullback in AAPL’s share price.
However, once AAPL started stock buybacks — which reduced the number of shares outstanding — the company’s EPS started to pick back up again because earnings weren’t being diluted among so many shares. This boost in EPS has helped lead to a boost in share price because investors are willing to pay more for a stock that provides higher EPS.
Eventually, this debt-fueled buybacks binge is going to end and, if economic growth has not picked up sufficiently by that time, we will most likely see the market pull back a bit.
However, that time is not now. Traders appear quite comfortable pushing stock prices higher and jumping back into the same momentum stock trades that they were shunning just a few short months ago.
John Jagerson and Wade Hansen are the editors of SlingShot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get 1 free month today. New to options and need more personal guidance – try our online options course: Strategic Investing and receive your first two weeks free by clicking here.
