S&P 500 May Be Set for Strong Performance as Technicals Align in 2023

02/06/2023

3 minutes read

2023.02.06 11:26

The S&P 500 has formed a golden crossover this year
This bullish formation historically indicates that the index is on its way toward having a positive year
Likewise, bullish sentiment is rising as the share buyback craze grips the markets

The is up +7.7% in the first 22 business days of 2023, the best start to a year since 1987.

Since 1928, the best starts are as follows (based on the first 22 working days and the rest of the year)

* Year 1987: +14.2% / -10.3%.
* Year 1975: +12.3% / +16.6%
* Year 1934: +12% / -15%.
* Year 1976: +11.8% / +6%.
* Year 2023: +7.7% /?

The 78% Pattern

Over the past 72 years, the S&P 500 has experienced a bullish pattern called the Golden Crossover (where the 50 and 200 averages cross each other to the upside) 36 times. This is the 37th time.

And what has the S&P 500 done 12 months after a golden crossover?

In 78% of the 36 cases, the S&P 500 went up 12 months later, with an average gain of +12.7%.

The Share Buyback Craze

A share buyback is when a company buys its own shares on the open market and writes them off (cancels them) to increase the price of the remaining shares. As fewer shares are outstanding, the shareholder’s stake in the company increases.

For example, a company has 1,000 shares outstanding, and an individual has 200 shares. This means that the investor owns 20% of the company. If the company buys back 200 shares and cancels them, there are 800 shares left. At this point, the investors’ ownership increases from 20% to 25%.

There are advantages to buying back shares:

1. The price of the company’s shares rises because fewer shares are in circulation, so each share has a higher value or price.

For example, a company has a market value of $100,000 and 1,000 shares outstanding, so each share is worth $100 (1000 x 100 = 100,000). If the company buys back 200 shares and they are redeemed, there will be 800 shares left, and the price of each of these shares will have risen from $100 to $125, an increase of 25% (1000 x 125 = 100,000).

2. Buying back shares also increases earnings per share.

For example, if a company made a profit of $10,000 and has 1,000 shares, earnings per share is $10 (10,000: 1000 = 10). If the company buys back 200 shares and writes them off (eliminates them), the profit per share increases by $12.5 ros (10,000: 800 = 12.5).

Now, on Wall Street, this is the usual means of rewarding shareholders and supporting the stock. On the other hand, it is less traditional in European markets, although it has recently become more popular in the banking sector. Chairwoman of Banco Santander (BME:) recently said that share buybacks are one of the best ways to create value for shareholders of listed companies.

In 2022, U.S. companies announced $1.26 trillion worth of buyback plans. This was 3% more than the previous year, and 82% were carried out. In Europe, 31% of listed companies bought back shares, although the vast majority bought back less than 0.5%.

Investor sentiment (AAII)

Bullish sentiment, i.e., expectations that stocks will rise in the next six months, increased by 1.5 percentage points to 29.9%. This is the highest level of optimism since 17 November 2022 (33.5%).

However, bullish sentiment remains below its historical average of 37.5%. Bearish sentiment, i.e., expectations that stock prices will fall over the next six months, fell by 2.1 percentage points to 34.6%.

This is the first time since January 2022 that pessimism has been below 40% for four consecutive weeks. However, bearish sentiment remains above its historical average of 31%.

The Gold Boom

The war in Ukraine boosted buying by +18% last year.

In fact, gold demand rose to levels not seen for more than 10 years thanks to strong buying by various central banks.

The World Gold Council said that gold demand rose to 4,740 tonnes in 2012, the most since 2011, driven by the biggest central bank purchases in 50 years. Turkey (4,000 tonnes), China (62 tonnes in November and December), and the Middle East led the way.