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Are Stock Buybacks a Bullish Sign? See This Chart for Answer
As is often the case, mainstream finance is looking at the wrong trend indicators

By Vadim Pokhlebkin
Wed, 15 Feb 2012 17:15:00 ET
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"Comcast Authorizes $6.5 Billion Buyback as Fourth-Quarter Profit Jumps 26%," read a February 15 Bloomberg headline.
 
Most investors see share buybacks like this one as bullish for the broad stock market. Says one investment strategist: "If the corporate community really agreed on the idea we’re heading to a recession, they wouldn’t be buying back their stock."
 
That logic makes perfect sense…until you dig a little deeper.
 
Consider what Elliott Wave International's monthly Elliott Wave Financial Forecast pointed out in the June 2005 issue:
 
"'Beware the buyback,' reported Barron's over a story about a new study by Rockdale Research. 'The most unexpected thing…was that corporations tend to buy back stocks at peaks, not troughs.
 
"[Robert Prechter's Elliott Wave Theorist] made the same observation in 1995…noting, 'Company officers are part of the market’s psychological fabric just like everyone else, and they tend to become bold when things look good, and that’s usually near a top.'”
 
Buybacks are hot again, so the February 13 issue of our Monday-Wednesday-Friday Short Term Update revisited this phenomenon for the subscribers. Here's a quote:
 
"...Stock buybacks! Here's how the article's author, citing the work of a researcher, rationalizes the bullish meaning of increasing corporate repurchases: 'Firms have been substituting share buybacks for dividends at a greater rate over the last 20 years... Stock buybacks contribute to total returns by putting upward pressure on stock prices.'
 
"Elliott Wave Financial Forecast subscribers will recognize the bullish claim, as our January [2012] issue busted this myth by publishing [this] chart..."
 
 
 
 
We show you this chart with Elliott wave labels erased, but you can see the undeniable pattern: Buybacks rise as stock prices rise, and fall when stocks fall. In fact, record highs in buybacks came right before the major S&P tops in 2000 and 2007 -- and notice that corporations were not buying much at the 2009 bottom, when stocks were cheap.
 
In other words, corporations are most confident at tops and least confident at bottoms.
 
Just like the rest of the mainstream investment public.
 
How can you break away from this vicious cycle? You need a different set of trend indicators.
 

 

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