Key points:
We are more positive given that a majority of global markets are back in an Uptrend, but would like to see the proportion rise to 70%+ for more confidence.
Global indices (Total World-VT, Nasdaq-0NDQC, iShares Developed-EFA, iShares Emerging-EEM, CSI 300-0CHSS300) have all bounced, but are still just in the middle of two-month ranges, at best, and volume to the upside on the recent bounce has been generally lackluster.
For the time being, focus on stocks that are part of broader working themes (we used groups with outsized proportion of stocks within 5–10% of highs to determine working themes), including:
Global utilities, segments of software in developed markets (U.S., France, Australia), payments/financial services globally, U.S. aerospace and defense, U.S./Europe med-tech, APAC real estate development, emerging market banks, emerging market telecoms, and China financials, food/food services, and medical services. Areas of consistent weakness include global autos/parts and steel, and developed market banks.
Normal down wave of just over 7% for the S&P 500. The quick retake of the 200-DMA is similar to the setup in
December 2012.
Friday’s follow-through day gives us some confidence, given the continuing corporate profit cycle and reasonable stock valuations, but we remain wary of tariff impacts and signs of lower forward growth expectations coming from the 10-year to three-month yield curve inversion.
The first follow-through day working (new highs) has happened in 18 of 32 past corrections of
9% or more on the S&P 500. Because we were down just 7%, the precedent is not exact in the
current case, but the concept remains similar.
If we retrace and close down 9% or more from highs, this leaves two more scenarios:
First follow-through day fails, but second works (new highs). This has happened in 8 of 32 corrections.
Multiple follow-through days fail and market forms lower highs and lower lows, resulting in a
bear (6 of 32 corrections).
With the market downgraded to a Downtrend this month, Randy Watts, our Chief Investment Strategist, along with our analysts, will review the signals we are looking for that would indicate a change in trend. He will cover historical examples of prior corrections and how to apply that knowledge in today’s marketplace. Equity Analysts Raj Gupta, Cornelio Ash, Dean Kim, Kenley Scott, and Andrew Kessner will also analyze watch list ideas from multiple sectors that they strongly believe should be on your radar.
William O’Neil + Co. has the U.S. equity market in a Downtrend. The S&P 500 and Nasdaq Composite undercut their May 13 lows and pierced through their respective 200-DMA. We are now looking for the market to establish a bottom and hold for three trading days to shift the U.S. to a Rally Attempt. After that, a follow-through day, where the market rises +1.7% or more on higher volume than the previous day, is required for us to upgrade the U.S. to an Uptrend.
However, the U.S. market is not giving encouraging technical signals. After a ~26% move up from the December 24, 2018 low, the S&P 500 has only corrected ~6% from its May 1 peak. As noted in our previous Strategy View on May 9, 2019, an average down leg in a bull market is 8% and occurs over 23 trading days. Therefore, the current down leg has not yet reached a typical percentage decline despite coming off a much better-than-normal up move. As a result, we believe this present down leg has further to go before the next upward leg.
This belief is strengthened by examining the percentage of NYSE stocks trading above their 30-WMA. This measure peaked at roughly 79% in April which is in line with a typical historical peak of 75–90%. It has been falling since and currently stands at 43%. While this is a major decline, we do not believe it is at a low enough level to represent a bottoming process in the market. Over the last 20 years, this metric has tended to reach 13–30% before rebounding.
The U.S. equity market was under pressure this week due to an increase in rhetoric from the U.S. and China regarding trade discussions. Importantly, the current U.S. administration singled out Chinese technology company Huawei for inclusion on the U.S. government’s Entities List. This list comprises foreign companies that U.S. firms are forbidden to do business with unless they have received approval by the U.S. government. In response to this, China threatened to completely halt further trade negotiations. As a result, the stocks of many U.S. technology companies, particularly semiconductor and semiconductor equipment suppliers, fell sharply.
This negative stock action was further exacerbated by two negative economic readings in the U.S. First, the U.S. Composite PMI fell from 53 last month to 50.9 this month, the worst reading in 36 months. In addition, U.S. durable goods orders for April fell 2.1% versus a gain of 1.7% in March. When combined with the previously mentioned trade issues, this caused investors to reconsider forward GDP estimates and corporate profit growth for U.S. public companies.
A better-than-expected earnings season and a slight increase to full-year 2019 EPS estimates have eased some
growth concerns.
Median S&P 500 sales and EPS growth of 4% and 7% outpaced consensus by 0.3% and 4.2%, respectively.
The EPS beat was the best in four quarters.
Over the past 30 days, median full-year EPS estimates have been revised slightly higher, the first bump in
at least two quarters.
After a 5–6% pullback in the S&P 500 and Nasdaq indices, we moved the market to a Downtrend. It is possible the
quick downside was just a brief shakeout, and we are encouraged by the indices’ quick retake of their 50-DMA.
Still, we need to see a couple more days of healthy action to upgrade conditions.
Leadership has also acted very well despite the pullback. Trends of secular growth (payments, software) leaders
remain largely intact, although most of these stocks are extended.
The stock is breaking out of a 16-week consolidation, turning actionable. The stock becomes extended above BRL 38. Support is at the 50-DMA.
Fundamental ratings: EPS Rank 97, SMR Rating B, Composite Rating 99.
Technical ratings: RS line at all-time highs, RS Rating 85, A/D Rating B-.
U.S. indices have corrected ~5% to this week’s lows. Median corrections for the past 120 years are 7–8%.
Revisiting style performance, small has begun to catchup a bit to large, and value has done similarly versus growth.
The relative comparison nearest a historical extreme is small growth versus large growth—which reached -13%
over a trailing one-year period recently.
Interestingly, even with this week’s volatility, small growth has improved slightly versus large growth since last week.
As U.S. indices continue to trade near all-time highs, we will take a look at some of the similarities and differences of stocks
that are near highs versus those further off highs.
We looked at 13 metrics within our data library and found medians of those metrics and looked at ranges of % off 52-week highs for each. In each column, green is the highest value while red is the lowest (except for EPS Stability Factor, where low-er is more favorable). The results are quite clear in that stocks nearer to highs are larger and have better EPS Ranks, EPS growth in the current quarter and estimates for 2019, better EPS stability, higher P/T margins and ROE, higher P/E ratios, and lower dividend payout ratios. Sales growth does not seem to be as big of a differentiating factor, nor does 2020 EPS growth estimates.
