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A large series of technical sales combined with a pause in stock repurchases by companies contribute to the liquidation of the stock market in October, said analysts JPMorgan. But the two factors seem to have largely followed their course, they said, and that could mean future gains.
"The biggest one-way buyer returning to the market after generating profits, we expect improved liquidity and higher shares," wrote stock strategists led by Dubravko Lakos-Bujas, in a Thursday note, referring to redemptions.
Many companies have put in place blackout periods that limit stock trading a few weeks before the earnings release and until shortly thereafter.
Companies should be prepared to accelerate the pace of redemptions, as the revenue cuts end, often within 48 hours of the earnings release, particularly because of lower prices and valuation from current sales, writes the analysts. Corporate tax cuts and repatriation legislation have probably contributed to an increase in redemptions, considered one of the pillars of stock market gains this year. (See the tables below).
In addition, the growing gap between announced and finalized buyouts is expected to narrow slowly towards the end of the year, they said. Here is more:
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We expected the growing gap between announced redemptions and executed redemptions to converge slowly at the end of the year; However, the last sale is likely to speed up the process as companies should accelerate stock redemptions after profits. We believe that the companies best placed to profit from the sale are those that benefit from an active buy-back program and come out of the blackout period. As a reminder, we expected a buyback activity of about $ 800 billion for the S & P 500 companies this year. This estimate is expected to remain cautious in view of earnings (25% vs. 22% expected), market volatility and still high foreign liquidity of about US $ 1.1 (25% vs. 22%). expected). |
A tailwind would be welcomed by the bulls of the market, with shares extending sharply down on Thursday which put the S & P 500
SPX, -1.44%
Dow Jones Industrial Average
DJIA, -1.27%
and the Nasdaq Composite back into negative territory for the week. The S & P 500 lost more than 5% in October, the Dow around 4.3% and Nasdaq, rich in technology, down about 7%. The S & P is 5.9% lower than its record high close at the end of September, while the Dow is at a similar level to its peak reached earlier this month. The Nasdaq is down 7.9% from its all-time high.
The bears have argued that stocks are falling hard for a variety of reasons, including fears that the Fed will be too aggressive in tightening rates, resulting in an economic slowdown in the coming quarters. It is also worrying that the US economy can not continue to grow at its current pace because of worries about global growth.
JPMorgan analysts found that the sale was similar to the February pullout that had sent the S & P 500 and the Dow Jones Industrial Average into correction territory with declines of more than 10% from their previous highs. They argued that, just like the February sale, the current decline is largely due to technical sales by systematic traders, a process they claim is about 80 percent complete.
If so, they said, the market should soon find support on a series of bullish factors, including redemptions. These factors include solid third quarter results, which should point to continued growth, lower market volatility that generally accompanies the earnings season, and increased liquidity at the end of blackout periods.
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