Author: Kenley Scott

Attached is the latest Sector Strategy Note from Global Sector Strategist Kenley Scott.

Key Points:

• U.S. market in a Downtrend for the first time since late March.
• The S&P 500 and Nasdaq below their 50-DMA and close to testing their 100-DMA. Small/midcap indices testing their 200-DMA.
• One standout category currently is the S&P 500 High Quality Factor ETF (SPHQ-looks for high ROE, operating asset growth, and low debt ratios).
• Two sectors of note are Energy and Health Care, both of which are coming from oversold levels over the trailing one year and outperforming sharply short term.
  • S&P 500 stocks within 5% of highs include SLB, HES, TRGP, MPC, REGN, LLY, and BDX.

Attached is the latest Global Sector Strategy from the Director of Global Equity Research Kenley Scott.

• Breadth takes a step back this week, with the percentage of stocks above 30-wk. MA on the NYSE down to mid-60%s from nearly 80%.
• During normal (minor) pullbacks within a bull market, this percentage comes down to the 40–50% range often.
• Steeper pullbacks can drop below 25%, while very deep corrections and/or bear markets can drop to below 15%.
• There was a high degree of dispersion of reactions this week with 35% of stocks reporting moving at least 7% on the week.
  • 22% dropped at least 7%.
  • 12% rose at least 7%.
  • Strong earnings beats helped, as those up >7% beat by median of 18%, while those <7% beat by 4%.
  • Also, high RS Rating coming in seemed to continue to work as a detriment. The leading group had an RS Rating of just 51 last week, compared to 81 for the negative group.

Key points from this report:

Update to long-term relative performance for all stocks above $100M market cap-outperformance fairly difficult to achieve:

And then looking at three different categories of leaders currently:

1) Long-term outperforming stocks (versus both S&P 500 and Nasdaq) which also have high current RS Ratings.

2) Long-term lagging stocks but with high current RS Ratings.

3) Washed out stocks, <-60% off five-year highs, but with high current RS Ratings.

The profiles of the three groups are very different, but each has a place. Essentially #1 is high quality growth, #2 is cyclical growth, and #3 is speculative growth. See attachment for the names in each which have already reported Q2 earnings.

Key Points:

• Around 10% of companies have reported earnings. So far:
  • Median sales/EPS growth of 6% and 3%.
  • Median sales/EPS beats of 0.7% and 4.7%.
  • Median reactions (for those reporting since June 1) of +3% but mostly driven by June gains.
  • Median reactions (for those reporting since July 1) of -0.2%. This week, -0.7% median reaction.
  • Stocks which were down YTD have had better reactions vs. those up YTD.
  • Strong reactions so far from managed care, drugs, money centers, regional banks. Weak reactions from airlines, savings & loans, advertising.
  • Some of the good results/reactions include BMI, JPM, UNH, NVS, UAL.
• Looking forward to the remaining ~90%:
  • Caution warranted on extended ideas, particularly those up significantly from Q1 earnings.
    • See attachment for names up >25% since last earnings, >25% above 200-DMA, >10% above 50-DMA, and >10% most recent pivot.
    • These include VRT, DKNG, NCLH, TDW, EXPI, MARA, IMGN, ACAD, DASH, PLTR, COIN, MSTR, SPOT, SMCI, SAIA, etc.
  • Interested in areas which haven’t moved as much since last earnings (<15%), that also expect positive sales/EPS growth and have seen positive recent EPS revisions.
    • Some of these include SHW, AL, APTV, BKNG, ACGL, ALC, VRTX, OPCH, DPZ, SFM, PATH, AVGO, ANET, ZS, etc

Key points from this report:

• Leading Nasdaq 100 (QQQ) was once again 23% above 40-WMA to end the week. Same % above as four weeks ago, which started a minor consolidation.
  • However, this time, only 6% above 10-WMA versus 9% above before. Also, no resistance until about 5% higher.
• U.S. breadth is much better, % of stocks in NYSE above 30-WMA up to 70% from 54% a week ago. Highest % since March breakdown.
• Breakouts were strong again, above 200 for the third week in five. No huge spike but very healthy.
  • Also, very healthy – where recent breakouts are versus their pivot price. ~75% are above the pivot price. Through May and early June, this proportion was consistently below 50%.
  • By-sector, Tech, Cap, and Cyclicals have outsized proportions of recent breakouts (since May 1). Financial, Staple, Energy, and Utility are under-represented.