×

Stocks will rally for this underappreciated reason: Technician

The market has room to run, and corporate payouts will be the driver, according to one technical analyst.

Data released by the Barclays equity research team this week showed that S&P 500 dividends and buybacks are on track to top $1 trillion this year, which would mark the first time in history that such an event has happened.

And while this has caused some concern about the forces undergirding the market, to Piper Jaffray technical analyst Craig Johnson, the increase in buybacks is a reason the market will continue to rally.

On a chart showing the share count in the S&P 500, Johnson points out that since 2010 the number of outstanding shares in the market has shrunk "by about 5 percent." This means that more companies have been buying back their outstanding shares, driving up stock prices in the market overall and helping to set up an improved earnings season.

"We're at a decade low in terms of shares outstanding, [which] means that the denominator, when we think about price over earnings ratios, is starting to shrink," Johnson said Wednesday on CNBC's "Trading Nation." "So earnings are going to be better than what I think people are expecting."

"I think this is a positive sign, and why we still think this structural bull market probably has more room to work as we think over the next couple of years," he said.


But not everyone shares Johnson's bullish view. Stacey Gilbert, head of derivatives strategy at Susquehanna Financial, actually sees the increase as a sort of "engineered growth" that may not ultimately benefit the market.

"The concern that I have [with] dividends and buybacks here [is that] what we're really lacking in is investment into the company, the R&D," Gilbert said on "Trading Nation." Research and development that leads to increased earnings is "what's ultimately going to help us grow."

In other words, Gilbert believes that while buybacks may be bullish in the short-term, they aren't setting a strong foundation for a long-term rally.


Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more

Connect