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

Posted on by Raj Gupta

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.

Market View

Posted on by Raj Gupta

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.

Carl Zeiss Meditec

Posted on by Raj Gupta

Key points from the report:

 

  • The stock is actionable as it forms the right side of a flat base. Support is along the 50-DMA.
  • Fundamental ratings: EPS Rank of 69, Composite Rating of 89, SMR Rating of B.
  • Technical ratings: RS line trending upward, RS Rating of 87, A/D Rating of B.

Market View

Posted on by Raj Gupta

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.

Market View

Posted on by Raj Gupta

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.

Market View

Posted on by Raj Gupta

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.

Market View

Posted on by Raj Gupta

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.

Market View

Posted on by Raj Gupta

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

Posted on by Raj Gupta

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

Posted on by Raj Gupta

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.