Key points:
Median S&P 500 sales and EPS are both forecast to grow 4% y/y, which would tie Q1 2019 for the slowest sales growth since Q4 2016 and would be the slowest earnings growth since Q1 2016.
However, we expect a normal beat of 3–4%. The bigger key will be to see if the trend in downward revisions after earnings comes to an end. Forward earnings have been consistently revised lower since September 2018.
Into the beginning of the season, the VIX is low, at 13, and investment advisors are slanted bullish, at 53%, although not an extreme level (60%+).
Given a falling 10-year bond yield (historically inverse relationship with market P/E ratio), the market multiple should expand. Unless forward earnings are much worse than expected, this could fuel a push further into all-time highs.
The stock is breaking out of an early stage 10-week consolidation in heavy volume, turning actionable.
Fundamental ratings: EPS Rank of 90, top SMR Rating of A, Composite Rating of 95.
Technical ratings: RS line near new highs, RS Rating of 89, A/D Rating of B.
The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq closed slightly lower this week, but both continue to hold trend above all major moving averages. The 21-DMA has risen above the 50-DMA on both indices and is now acting as our primary level of support. Resistance is all-time highs on the S&P 500 at 2,964, while resistance on the Nasdaq is the June 20 intraday high of 8,088. Distribution remains low at one day on the S&P 500 and two on the Nasdaq.
Sectors that sold off earlier in the week, including Transportation, Consumer Cyclical, Health Care, and Financial, were able to retrace the majority, if not all, of early week losses over the last two sessions. Ten of 11 O’Neil sectors are trading back above their respective 50-DMA, with Energy sitting just slightly under that level. Following Friday’s rally in Financials, 72% of S&P 500 stocks are now trading above their respective 50-DMA, up from 70% last week.
We remain in a news-driven environment with major catalysts potentially occurring over the weekend. As of now, the Confirmed Uptrend remains intact, with current upward progress in-line with historical successful follow-through days, leading ideas that are holding support, and a low number of distribution days. We recommend a patient approach, holding leading ideas and looking to increase risk should the market push up and through resistance in the coming days.
Strategy View
The Global Index (VT) is back above the 50-DMA for the first time in six weeks.
Market conditions are skewed positive. The 50-50 market direction indicator turned positive two weeks ago and
now more than 75% of global markets are in a Confirmed Uptrend. Generally higher conviction at 70%+.
• While the U.S. and mostly other small markets ( Australia/N.Z., Greece, Poland, Russia ) were the leaders
through last week, we had several major upgrades this week. On the DM side, there were follow-through
days in the U.K., Japan, and Hong Kong, among several others; and on the EM side, there were follow-
through days in Brazil and Taiwan.
The U.S. market had a typical pullback after a larger-than-normal leg higher through April. The first follow-
through day is working (historical success rate of ~55% on the first try after pullback from highs).
• Number of U.S. Focus List stocks back well above long-term average of 50, at 64 currently.
Number of weekly breakouts in the U.S., developed, and emerging all back to normal or above normal levels.
Global themes with most breadth in leadership:
• U.S.: payments/financial services, software, med-tech, aerospace/defense
• Developed ex-U.S.: chemicals, financial services, software, aerospace/defense, food/beverages, med-
tech
• Emerging ex-China: banks, consumer loans, real estate development, telecom, apparel/consumer, min-
ing
• China: banks, food/food service/alcohol, medical service, construction equipment
• Frontier: banks, telecom, cement, retail
Key points:
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.
