With earnings season nearly over, median S&P 500 sales and EPS grew 6% and 14% y/y, respectively. The
median beats were 0.4% and 2.6%, respectively. The EPS beat was the lowest in eight quarters.
• The best growth outside of Energy was in Capital Equipment and Transports. Consumer Staples had the
poorest growth.
• The best EPS beats were in Cyclicals, Retail, Transports, and Technology. The worst were in Financial and
Staples.
Q1 will likely be a second quarter of slowing growth, with the median expectations now at 4% for both sales and
EPS. These estimates have decreased sharply over 90 days.
• Growth in the second half of 2019 will need to accelerate to sustain the market uptrend. The current
consensus is this will likely occur.
Regarding the continued market strength: the 11% gain over the past two months is the eighth January/February
gain of +8% for the S&P 500 since 1970.
• In the seven prior instances, the S&P 500’s final 10 months performed above average.
• In two of those instances, 1975 and 1991, the S&P 500 began the year below its 200-DMA, as it did this
year. In those two cases, the S&P 500 gained 10% and 14%, respectively, in the final 10 months.
Author: Raj Gupta
Raj Gupta is Director, Research Analyst.
After joining the firm in 2002 as a research analyst, Raj was appointed senior equity analyst in 2006, and lead senior equity analyst in 2014—largely because of his ability to select outperforming stocks. He acts as an expert in the O’Neil Methodology and contributes to the direction of product and service line development. He recommends securities for addition to or removal from the U.S. Focus List, or USFL, and the associated alerts to clients. During his tenure, he was part of the leadership that developed the Global Focus List, which marked the firm’s successful expansion into international equity recommendations. He is also a lead on the IPO Rewind report and contributes to weekly summaries on the performance of the U.S. market. Much of his expertise is delivered as highly customized service to clients.
RAj earned his Bachelor’s degree in Economics from the University of California, Santa Barbara. He began working at the firm directly out of college, driven by his passion for investing and stocks. An avid soccer player, he built and managed an adult league in the Los Angeles area, in which he still plays. He also enjoys international travel; he and his wife commit to at least one major adventure a year.
Market View
One of the factors fueling the recent U.S. stock market rally from the December 2018 low are investors’ hopes
that 2019 will represent the trough year in U.S. corporate earnings growth. Q1 2019 projections for a 2% drop
in earnings could mark the low point, as Q2–Q4 earnings are expected to grow 1%, 2%, and 9% respectively. If
growth re-accelerates into 2020 after a trough in 2019, the precedent points to strong 2019 gains.
Bloomberg Intelligence Chief Equity Strategist Gina Martin Adams notes there have been 13 previous earnings
cycles for the S&P 500 since 1950. In 11 of 13 instances, in the trough years for earnings growth, the S&P 500
had positive returns with an average return of more than +10%.
We note the already above-average wave, that is, the current rally leg with no intermediate down leg of 5% or
more, is close to 20% gains off December lows. This uptrend may be pricing in the aforementioned trough, in
which case a short-term pause would be beneficial for further gains.
Breadth has been very strong (~75% of NYSE stocks are above their 30-WMA, and ~90% of S&P 500 stocks are
above their 50-DMA), a bullish signal for further gains. However, while this level of breadth is typical in big
bounces, it is not usually sustainable. In the recovery from the last two major corrections (2011, 2015–2016),
the market experienced a similar spike in breadth. During the subsequent pause/pullbacks, which each lasted
approximately two months, the amount of divergence between stocks increased (less breadth). Despite a more
clear separation of winners and losers, the market continued higher thereafter.
Market View
Technically, U.S. markets have made great progress since the December 24, 2018 low. All major indices are in
a Confirmed Uptrend and have risen above their 50-DMA. The rally has been broad-based, with all 11 sectors
trading above their 50-DMA. Headwinds remain in the form of overhead supply (6–10% or more off highs in
most cases), some downward-trending moving averages, and 50-DMA that are nearly all still below 200-DMA.
Given the strength of the rally, we have several observations.
First, an 18% rally on the DJIA since December lows, with no 5% pullback, is higher than the average leg
of 14% (11% median) in a bull market, dating back to 1900. One leg is a 5%+ move in either
direction. A leg of a 15% gain immediately following a 15% loss, which we just had, is very rare,
occurring only four times prior to the current leg.
We expect volatility to resume, given the continuing macro uncertainty such as slowing European
economies, lower growth in China, continuing trade tensions between the U.S. and China, partisan
political conflict in the U.S., and slowing U.S. corporate profits. As a result, it seems unlikely that 2019
gains will continue without any counter-trend down legs.
In addition, while Q1 is the second-best quarter for gains, Q2 and Q3 are usually much weaker. In fact,
for the S&P 500, Q2 is normally up only +2% while Q3 is flat. In the third year of a presidential cycle,
those figures are +5.5% and -1.0%, respectively, but we wonder if January and February’s performance
has pulled forward some of the gains for the year.
While we are not preempting the move and will wait for price action to dictate a change in our bullish stance, it
would be historically in line for the markets to pause or retract some of their recent gains after earnings season.
We are already 49 days into the current rally. If there is a pullback from current levels, it would not be abnormal
to see a median move downward of roughly 6%. If the market did experience a typical “third-leg” pullback, it
would put the S&P 500 at approximately 2,600, slightly below its 50-DMA.
Top Medical Equipment and Device Ideas Webinar with Raj Gupta — February 14, 2019
After correcting 20% in late 2018, the iShares U.S. Medical Devices ETF has rallied and is now trading back above its 50- and 200-DMA. However, much of the rally’s gains can be attributed to the index’s mega-cap constituents, as multiple other growth-oriented medical device plays remain in consolidation. In this week’s webinar, William O’Neil + Co. Director, Research Analyst Raj Gupta will reveal which ideas he believes have the fundamental and technical characteristics to climb to new highs.
Global Health Care Sector— Medical Devices and Equipment
Some highlights from the report:
U.S.
- Given the U.S. market is currently in a Confirmed Uptrend and the iShares U.S. Medical Device ETF ( IHI ) has regained its 50- and 200-DMA, we now recommend buying fundamentally sound Medical Technology ideas that have recently emerged from first- and second-stage bases.
- Multiple ideas have reset their base counts after a severe December selloff. Our recommendation is to buy quality ideas that have recovered the quickest with relative strength lines at or near new highs.
- Fundamental profiles remain intact and valuation and growth remain in line with historical medians. The current 70 profitable companies above $500M in market cap within the Medical Product and Equipment industry groups have five-year EPS median growth of 13% and a five-year median (high-to-low) P/E ratio range of 17 to 46. Over the next year, consensus calls for similar growth and valuation. Next fiscal year’s EPS is expected to grow a median of 13% with a P/E ratio of 24x.
- U.S. Focus List ideas: Dexcom ( DXCM ), Edwards Lifesciences ( EW ), Intuitive Surgical ( ISRG ), Medpace ( MEDP ), and Wright Medical ( WMGI ). U.S. Stocks of Interest: Abiomed ( ABMD ), Boston Scientific ( BSX ), Genomic Health ( GHDX ), Illumina ( ILMN ), Omnicell ( OMCL ), and Staar Surgical ( STAA ).
EMEA
- Health Care remains a long-term leading sector, and ideas have begun to surface over the last month. We recommend buying quality ideas that are emerging from early-stage bases.
- European Focus List ideas: AFXX.DE, VITR.SE. Stocks of Interest: ELKB.SE, SRT3X.DE, STMN.CH.
APAC
- The APAC region is beginning to improve technically following major corrections in key markets over the last year. Most ideas remain more than 20% off highs and are not ready to buy. We recommend a selective and patient approach, waiting for technical profiles to improve in fundamentally sound ideas before buying.
- APAC Focus List idea: AS@H.JP. Stocks of Interest: NAN.AU, OLYC.JP.
Market View
Strategy View
U.S. indices found resistance this week at their respective 200-DMA. Given the rapidity of the market’s recent
ascent and the amount of overhead supply, it is not surprising the S&P 500 and Nasdaq paused when hitting
this moving average.
While a sideways move or small pullback from here would be normal action, we do not want to see a sharp
move downward accompanied by an increase in distribution days from the indices’ failure to move through the
200-DMA on this attempt. Importantly, we do not want to see a move below the low of the January 4 follow-
through day, as this would be a very bearish signal.
Overall, the market has been mixed the last two weeks. While technically stocks have acted better, both in terms
of price and breadth, and growth sectors have been leading, the fundamental earnings picture for U.S.
companies has continued to weaken. Forward earnings estimates have fallen to such a degree that the Street
now forecasts a roughly -1% earnings comparison y/y for Q1 2019. This is in marked contrast to consensus
expectations this past fall for +8% earnings growth in Q1 2019.
Presently, U.S. markets are in a Confirmed Uptrend according to our disciplined O’Neil Methodology, which
combines technical, quantitative, and fundamental aspects of analysis. However, whether this current move is
merely a tradeable rally within an overall negative market cycle or the beginning of a new bull run remains
unknown. We urge clients to remain alert to possible changes in the environment as we feel volatility will remain
high for the time being.
The U.S. market is in a Confirmed Uptrend. Indices pulled back this week after hitting resistance at the 200-
DMA. The distribution day count increased by one and stands at two days on the S&P 500 and one on the
Nasdaq. Despite the small rise in distribution, price action across leading stocks remains constructive. While
consolidating below the 200-DMA, we would need to see indices avoid a clustering of distribution days for us to
remain bullish on leading stocks.
Sectors: Leading sectors over the trailing four weeks include Capital Equipment (+6%), Technology (+6%),
and Transportation (5.7%), while Retail (0.2%), Energy (+0.3%), and Material (+1.4%) are lagging.
Industry Groups: Since the January 4 follow day, multiple groups have participated in the rally. Software
continues to lead with five groups ranked in the top 15, including the top three groups. Other leaders includes
Aerospace/Defense, Insurance Brokers, Computer-Tech Services, Telecom, Electronic Measuring, and Payment
Processors.
Ideas: Although indices are pulling back, leadership continues to exhibit constructive price action. Positive traits
of leading stocks include pulling back to price or moving average support on quiet volume or bucking the trend
and rallying higher on above average volume. Examples includes Coupa ( COUP ), Trandigm ( TDG ), Xilinx
( XLNX ) and Autodesk ( ADSK ).
Market View
O’Neil Market Strategy: S&P 500 earnings are decelerating, but the S&P’s P/E ratio has also fallen significantly
given rising 10-year yields. Considering the Fed’s pause, if yields continue to come off highs, P/E ratios could
see moderate expansion once again.
A 6% gain since the January 4 follow-through day on the S&P 500 lines up with the average of second follow-
through days that have led to extended bull markets in the past. The S&P 500’s 7% gain in January was only the
fifth time since 1970 when a 7% monthly loss was followed by a 7% monthly gain.
The four (1974, 1987, 2002, 2009) other instances ended prior bear markets, and one (2011) ended a large
market correction. Historically, once this precedent is established, forward gains are well above average for the
next six months. An S&P 500 gain of >5% in January (nine prior instances since 1970) similarly leads to a well
above average for the next six months.
Technical setups are much improved, with all indices and sectors above their respective 50-DMA. Tests of the
200-DMA are looming for sectors, and a majority remain more than 10% off highs.
The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq rallied strongly this week and are now
sitting just below their respective 100-DMAs. We expect consolidation around current levels due to the sharp
rally into this next level of moving-average resistance. Look for major averages to avoid any clustering of
distribution and for leading ideas to remain technically intact.
Sectors: Since the follow-through day, six sectors have rallied more than 10%, with Transportation, Consumer
Cyclical, and Technology each rallying more than 13%. Though defensive sectors have lagged, Utility and
Consumer Staple have still rallied over 5% since the follow-through day.
IPO Rewind
This report identifies a select group of IPOs or spin-offs that have priced in the last two years, giving them time to digest any initial volatility and release a few quarters of earnings. Our selected ideas display positive fundamental trends with strong top- and bottom-line consensus estimates, and IPO Rewind provides an efficient way to review these ideas that we believe warrant attention.
Stocks highlighted in this report: Adyen (ADYE.NL), Alteryx Inc (
), Docusign Inc (
), Livent Corporation (
), Twilio Inc (
), Yeti Holdings (
), Zscaler Inc (
).
Market View
The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq held support along their respective 50-DMA early
this week, before pushing higher on Friday. Both indices are now testing resistance at January 18 intraday highs (S&P 500:
2,675; Nasdaq: 7,185) before a potential move to the 200-DMA. Overall action remains constructive with just one
distribution day on the S&P 500 and zero on the Nasdaq.
Since the follow-through day, five sectors have rallied more than 10%, including Transportation, Consumer Cyclical, and
Technology, which each have rallied more than 11%. Nine of 11 sectors remain above their respective 50-DMA, with only
Utility and Consumer Staple still trading below that level. The rally is broadening, led by industry groups across multiple
sectors including Apparel, Banks, Brokers, Computer Tech Services, Internet, Medical Products, Mortgage Services, Payment
Processors, Rails, Restaurants, Semiconductors, and Software, among others.
Market View
The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq both regained their respective 50-DMA. We will look
for this level to act as support should the market pullback. The next level of major resistance is the 200-DMA (S&P 500:
2,741 (+2.6%); Nasdaq: 7,451 (+4.1%)). Action remains constructive with just one distribution day on the S&P 500 and
zero on the Nasdaq.
Since the follow-through day, five sectors have rallied more than 10%, including Transportation and Consumer Cyclical,
which each rallied more than 11%. Further, nine of 11 sectors regained their respective 50-DMA, with only Utility and
Consumer Staple still trading below that level. The rally has been broad, led by industry groups across multiple sectors
including Apparel, Banks, Biotech, Brokers, Computer Tech Services, Internet, Medical Products, Mortgage Services, Rails,
Software, and Trucks, among others.
