Friday, April 24, 2015

U.S. Equities Topping Process Is Ongoing

The technical picture of American equity market is still deteriorating. Toady Nasdaq 100 printed another once again the record was accompanied with worsening market internals. Please, look at the table below:

As it is easily spotted, subsequent records printed by S&P500 and Nasdaq 100 are reported at lower new highs. For example, at Nasdaq 100 only 219 issues hit their records today while in the middle of the bull market, in May 2013, as many as 236 issues made records. The similar pattern is visible in S&P 500.

Another example of worsening technical picture of the equity market is presented at the chart below:

 In October last year both indices, Industrials and Transportation, broke their supports. Then the bearish pattern was invalidated and equities started another bull up leg. But since December 2014 Transportation has been trading in the range of 8,600 - 9,200 points. DJIA managed to print another record (in the beginning of March) but this occurrence has not been confirmed by the sister indice.

In my opinion since October 2014 the U.S. equity market is in its topping pattern.

As for fundamentals - below I present a chart of  net operating profit after taxes reported by Ebay. I guess everybody knows this company. Apart from an excellent ecommerce platform, this company is also an excellent investment play. But looking at the company's nopat one can spot that this company probably reached a sort of plateau. Since the beginning of 2013 nopat has been staying practically unchanged (with spikes in Decembers, which are usually the best months for ecommerce companies).

Another problem - return on invested capital (ROIC). As the chart below shows, since 2011, Ebay has reported lower ROIC. Simply put, the company is not able to provide its shareholders with decent returns on its capital (with cost of capital of 9.84% for on-line retailers Ebay is nearly at its break-even point).

Therefore, as other U.S. corporations, Ebay repurchases its shares - since 2011 the company has spent $9.7 billion on stock repurchases.