We continue to recommend avoiding the Medical-Managed Care Industry Group, which is now ranked 193 of 197 groups (1=best, 197=worst). The Industry Group chart broke long-term support along its 200-DMA in December and has not fully re-
covered. It is now once again testing support at December/January lows and though we may see a near-term rebound post-UnitedHealth Group (
) earnings, individual charts are broken and need time to recover.
Strategy View
The negative trend in earnings revisions for the current quarter and year has continued for both the S&P 500
and S&P 600. This trend of downward revisions began at the end of September 2018 and has continued non-
stop. Given how far estimates have fallen, we are hopeful the hurdle is now low enough that estimates can be
revised upward for Q2 2019 and beyond, when companies give forward guidance during this season’s earnings
calls. If this does not occur, it would increase our nervousness about a potential pullback from the current rally.
The key companies reporting this week, including JPM and WFC, both posted better-than-expected top- and
bottom-line results. However, only JPM gained (+5%), while WFC fell due to weak guidance overshadowing the
earnings beat.
In this week’s webinar, Executive Director, Research Analyst Raj Gupta reveals the fundamental and technical characteristics our analysts believe are necessary for successful new issues. He will be joined by other O’Neil analysts, who will provide exclusive insight on select IPOs and other ideas they are watching.
Please note that this webinar will only be accessible through Research View in PANARAY or in the Research Library.
Strategy View
Q1 earnings season is expected to be a significant deceleration from Q4. Median S&P 500 sales and EPS growth of 3% and 4%, respectively, would be the lowest since 2016. We do expect normal beats of 1% for sales and ~3% for EPS. Any lower-than-normal sales and EPS beats, or poor guidance, will put significant pressure on the ongoing rally.
Bull investment advisor sentiment reading of 53% and a VIX of 13.5, are bullish but not extreme, similarly making the results of this earnings season a large variable.
Index and sector setups are broadly positive ahead of earnings, with all now supported by upward-trending 50-DMA.
Best sector setups into earnings are Technology, Health Care, Capital Equipment, and Staples.
While the number of actionable U.S. Focus List stocks is smaller than over the previous two months, a few strong setups include AMZN, PAGS, CCMP, ISRG, LULU, GLOB, and FOXF.
An inverted three-month (13-week) to 10-year yield curve has been a good predictor of recessions (about
12 months out).
Inversion does not always lead to weak market performance but does so on average.
o In all cases where the curve inverted on a weekly basis since 1962, average 4/8/13/26/52-week
forward performance for the S&P 500 is negative.
Cyclicals and Utility tend to be weak, while Material has performed the best.
Interestingly, Utility is currently the best performer over one year, while Material is the worst. A
mean reversion could be approaching.
The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq held their respective 21-DMA this
week, consolidating gains. The 50-DMA is now moving above the 200-DMA and will act as another layer of
support should the market pull back. There are currently six distribution days on each index, though four will
expire within six sessions beginning next Wednesday.
Leading ideas are consolidating constructively, with few major technical breakdowns. We will look for secondary
entry points in leading ideas over the next several weeks. Generally, bases take five to seven weeks to complete
and should occur above near-term support levels, including the 50-DMA, the 100-DMA, or prior pivot points.
We recommend a selective and patient approach as the market consolidates. We would like to see distribution
subside and the right-hand side of bases begin to form over the next few weeks before recommending any
meaningful increase in risk.
Sectors: Over the last five sessions, Transportation, Capital Equipment, Consumer Cyclical, and Retail are
leading, while Technology and Utility are lagging. Technology remains a long-term leading sector despite the
recent pullback, and is still trading above 21-DMA support.
Key points from the report:
Strategy View
Presently, U.S. equity markets remain in a Confirmed Uptrend. The indices’ progress since the December 24,
2018 low is nothing short of amazing, with all major indices up at least 18% as of March 21. All but the Russell
2000 are above both their 50- and 200-DMA.
One of the more remarkable aspects of the current rally is that most asset classes have made positive moves in
unison; U.S. bonds, U.S. stocks, oil, and metals have all risen. Every single one of our 11 sectors has posted
strong returns as well.
In addition, the spread between the best-performing sector, Technology (+20.7%), and the worst, Consumer
Staple (+9.6%), is 1,010bps. Technology’s gain is only 6% greater than the average, while Staples lags the
average by approximately 4%.
On a relative basis, Utility is still the best performer over the trailing one-year, and recently reached a historical
extreme of +20% versus the S&P 500. In fact, it may be near a relative peak, especially if the worst of the 10-
year yield slide is over. Materials are by far the worst over the trailing one-year, lagging Utility by nearly 30%.
This could be at a trough, but this sector likely needs improvement in the economy to revert.
Elsewhere, Technology is slightly outperforming the S&P 500 over the trailing one-year but is trending positively
(particularly in semis and software), while Retail still holds a large lead, but continues its relative deceleration.
Lastly, Energy’s relative trend is improving, but it still has some distance to make up before it becomes a leader.
So far, this rally has rewarded investors regardless of the sectors in which they are invested. Going forward, we
expect performance to be much more dispersive, and the importance of selecting the correct sectors to invest in
will be much higher.
As mentioned in our Global Sector Commentary on February 22, once breadth (as measured by the percentage
of NYSE stocks above their 30-week average) moves higher than 75%, further market gains tend to be met with
a narrowing of breadth. As a result, we expect larger divergences for the remainder of the year.
Recent global economic data continues to be weak as evidenced by declining GDP projections from the
Organisation for Economic Co-Operation and Development (OECD). The intergovernmental organization
released its updated 2019 world economic growth forecast on March 6, cutting its global GDP estimates to 3.3%
from 3.5% in November 2018. Specifically, OECD cut its U.S. projection from 2.7% to 2.6%.
We believe investors have responded to this slower global growth outlook by increasing exposure to companies
with stronger secular growth profiles as opposed to cyclical ones. If we examine the leading O’Neil Industry
Groups over the last month, we see many of them are in the long-term growth areas of Technology and Health
Care, including Software, Semiconductors, Computer Networking, Telecom, and Medical Services. Indeed,
Technology, with 22 stocks, and Health Care, with six stocks, represent a combined 48% of the U.S. Focus List.
In addition, the lack of inflation in the U.S. means investors might be more willing to pay a higher multiple for
growth. The U.S. Labor Department’s figures released on March 12 showed only a 1.5% increase in CPI for the
last 12 months through February. This was the slowest rate of increase since September 2016 and a
deceleration from January’s +1.6% pace.
With the current S&P 500 P/E at 16.8x 2019 and 15.1x 2020 based on consensus Wall Street earnings
estimates, the U.S. stock market is not overly expensive, and is close to its five-year average of 16.4x. As a result,
we believe growth stocks can experience a multiple premium and possible P/E expansion in the current
environment.
The U.S. market has been moved back to a Confirmed Uptrend. The S&P 500 and Nasdaq cleared above a
longer-term range of resistance on Friday. The next level of resistance is ~2,864 on the S&P 500 and ~7,873
on the Nasdaq, where both indices originally broke below their respective 50-DMA last October 2018.
Distribution stands at five days on the S&P 500 and four on the Nasdaq, with one additional day expiring on the
S&P 500 at next Thursday’s close.
Seven sectors are now trading above their respective 200-DMA after the strong rally this week. Technology
continues to lead with multiple industry groups including Software and Semiconductors back under
accumulation. Health Care has also come under recent accumulation after finding strong support at its 50-DMA
this week.
Leading ideas are acting very strong. Extended leadership continues to hit higher highs each day, showing few
signs of technical weakness, while new potential leaders continue to emerge from consolidation. We recommend
buying quality ideas at exact pivot points, while also locking in partial gains in ideas that have rallied 20–25% or
more from an ideal pivot.
U.S. indices entered the week overbought in the short term after a +18% rebound by the S&P 500 from its
December 24, 2018 low. While the strong start to 2019 is a precedent for better long-term gains, the
magnitude of the rally from the December 24 low, combined with the peaking breadth as measured by the
number of NYSE stocks above their 30-week moving average, suggest market pullback is likely.
The market-leading Russell 2000 is already down roughly 5% from its recent peak at 1,602. Using past
historical examples, a downward leg of 5–8% from the recent peak closing price of 2,803 on March 1 would be
normal for the S&P 500.
Presently, Wall Street consensus is for earnings growth to trough in Q1 at -3% for the S&P 500, and recover
sequentially for the rest of the year, according to FactSet. Improvement after the March earnings quarter is
probably necessary if stocks are to have a major move higher from here.
If the market does have another substantial up leg, we expect breadth to be narrower than it was in the move
from December 24, 2018 to March 1, 2019, on both a sector and individual stock level. The number of U.S.
breakouts are back to a more normal level for the first time in five months after being well below
average. Additionally, our U.S. Focus List is back up to 52 names, a typical number of recommendations for
us. However, given the strength of the recent rally, some stocks are extended, and we would encourage investors
to trim those positions.
