Author: Kenley Scott

Key Points:

• Downtrend worsens into last week’s end. U.S. indices were down at least 2.5% apiece and smallcaps were making new cycle lows.
• As written about for a couple of the last few weeks, the potential for a big bounce in oversold areas certainly exists (Health Care, Staple, Utility, smallcap, solar, medtech, etc.), in which case, would look for a follow-through day to begin that process.
• But, also want to focus on improving relative strength in the downtrend. Among the ways stocks emerge as leaders:
  • 1) RS improvement during downtrend and continued outperformance once the market turns. For example, Elf Beauty (ELF) since May 2022.
  • 2) Poor RS during downtrend, but immediate leadership from the market turn. For example, Nvidia (NVDA) since October 2022.

Key Points:

• On a YTD-basis, the Nasdaq is leading the equal-weight S&P 500 and the Russell 2000 indices by 29-30%. It is also beating the S&P 500 by 15%. This is an abnormally wide spread.
  • Average annual spread of best to worst index since 1970 is 16%. Above 30% has only been surpassed once since 2000.
  • Since July, mega-cap Tech has further dominated, pushing the relationship versus small-caps to extreme levels.

Key Points:

• With Q3 earnings approaching, a look at the last quarter and forward expectations.
  • In Q2, S&P 500 companies beat EPS estimates by 5%, a bit more than normal… yet had clearly negative reactions.
  • The S&P 500 was down around 4% from the beginning of Q2 earnings season until end of last week, but median stock performance was -9% post-results.
  • Six sectors down median of double digits. Energy and Technology were the best two at -3% median.
• For Q3, companies expect a median of 3% sales and 4% EPS growth. Over the last 90 days, revisions have been slightly downward.
  • Overall S&P 500 median -1% versus 90 days ago.
  • All sectors except Technology and Cyclical down.
  • Materials and Transports estimates have come down double digits.
• For full-year 2023 and 2024, most companies have seen negative revisions most recently.
  • For 2023, 44% of S&P 500 companies have had last estimate revised down.
  • For 2024, 43% of S&P 500 companies have had last estimate revised down.
  • Energy is the only sector with positive latest revisions for both years.
• Looking back at the past two quarters, the market setup was the opposite. Indices rallied into the start of earnings but wavered after.
  • In Q1, the S&P 500 rose 7% over the prior four weeks before earnings but was down slightly over the next four.
  • In Q2, the S&P 500 rose 3% over the prior four weeks before earnings, continued a bit higher but then rolled over aggressively.
  • Into Q3, the S&P 500 is down 4% over the prior four weeks into the first week of earnings.
• Two quick related screens yielding interesting results:
  • Stocks with positive earnings reactions after Q2 results and with overall positive recent earnings and forward outlook. Ex: ROP, TT, SNPS, ANET, NVDA.
  • Stocks with negative earnings reactions after Q2 results and with overall positive recent earnings and forward outlook. Ex: CARR, JPM, COST, ADBE, NOW.
  • See attachment for full screen criteria and list of stocks.

Key Points:

• Seasonal averages have played out fairly well this year and to an exaggerated degree in the case of the Nasdaq Composite.
• After getting through a somewhat anticipated tough Q3 period, the Q4 seasonal picture does look better.

Key Points:

• QQQ is best major global index over 1-year, with a 31% gain. Developed markets have averaged a 13% gain while emerging markets are up 15% on average (just 4% median stripping out outliers Turkey and Egypt).
• Looking at QQQ versus four areas: US Small-cap (IWM), Global ex-US (ACWX), Developed (EFA), Emerging (EEM)..see that nearing extreme levels versus IWM and EEM but not versus ACWX or EFA.
  • +22% vs IWM over 1 year, better only 7% of all weeks since 2001.
  • +23% vs EEM over 1 year, better in 20% of all weeks since 2003. Recently hit a +30% peak which is better than all but 7% of weeks.