Author: Randy Watts

Randy Watts is Chief Investment Strategist for William O’Neil + Company. Mr. Watts manages William O’Neil + Company’s research department and guides the development of the company’s suite of services. He oversees the strategic direction and focus of the company’s research content, and his buy-side experience provides additional insight that allows the company to leverage its experience and expertise to help clients generate alpha. Mr. Watts has more than 25 years of equity asset management experience with specific focus on large- and small-cap growth stocks. He started his professional career as an Equity Analyst at Freedom Capital Management in Boston, MA. He spent nine years at Westfield Capital Management as an Equity Analyst then as a Partner and Portfolio Manager overseeing a $500+ million growth stock portfolio. Mr. Watts served as a Senior Managing Director for small- and mid-cap growth investments at The Boston Company, where he managed $4 billion in both long and long/short equity portfolios. During his tenure at the Boston Company, he hired, trained, and managed a team of investment professionals. Most recently, he ran a long/short equity hedge fund for Folger Hill Asset Management in New York, NY. Mr. Watts graduated from the University of Virginia with a degree in American Studies and is a Chartered Financial Analyst.

Strategy View

Posted on by Randy Watts

Key Points:

  • Median 4% sales and 3% EPS growth expected for S&P 500. 3% sales and -2% EPS for S&P 600.
    • Fourth quarter of median earnings deceleration for the S&P 500 expected. Sales expected flat from last two quarters, which matches lowest in seven quarters.
  • Notably, the trend of lower estimates has been happening for several quarters and is not abating. Since May, S&P 500 Q3/Q4 2019 and Q1/Q2 2020 estimates have all come down substantially. This is true even after a 3% earnings beat in Q2. But, full-year 2020 numbers (black line) have not come down much. This likely means a further revision lower is necessary.

Strategy View

Posted on by Randy Watts

Key Points:

Technically, the overall commodity complex remains very weak. The Invesco DB Commodity Index is nearly 20% off 52-week highs, well below both the 10- and 40-WMA. In addition, it has undercut the May lows suggesting further downside risk. There is support at the December 2018 lows. A retest of that level is possible as most commodities outside of precious metals ( majority of index weighting ) are trending lower.

Marked divergence within the space, as commodities related to agricultural consumption and most related to industrial production are very weak, while precious metals are trending higher.

We will be watching for some consolidation near highs in the leading precious metal groups and, conversely, weak bounces from lows in the other lagging commodity groups for new opportunities to play the inverse trends.

See attachment for stocks of interest in both best and worst groups.

Strategy View

Posted on by Randy Watts

Key Points:

 

  • Median Q2 S&P 500 earnings grew 6% y/y while revenues rose 4%. EPS beat by 3%.
    • Health Care had the best quarter, with 6% revenue and 12% EPS growth, and among the best beats for both.
    • Material and Cyclical were weak, with below average revenue growth and almost no earnings growth.
  • Median y/y Q2 S&P 600 EPS grew just 2% y/y, even with a 4% upside surprise, while revenues rose 4%.
    • Staple and Technology had the best quarters, well above overall median EPS growth.
    • Cyclical and Financial were weak, with -4% and 0% EPS growth, respectively.
  • Forward estimates continue to fall. Median Q3 S&P 500 earnings are expected to grow 3%, down 1.2% from 90 days ago. Median Q3 S&P 600 earnings are expected to be flat, down 4% from 90 days ago.
  • 2020 EPS estimates are probably too high, but as long as we do not slip into an earnings recession, we remain hopeful of the bull’s continuation.
  • Indices are just below their 50-DMA, and nine of 11 sectors remain below that level as well. We remain in an Uptrend Under Pressure until this improves.
  • We have 58 USFL names, still above the long-term average of 50. However, only a few are currently actionable.
    • American Tower ( AMT ), Applied Materials ( AMAT ), Ceridian ( CDAY ), Fleetcor ( FLT ), Hubspot ( HUBS ), Interxion ( INXN ), Keysight ( KEYS ), Motorola ( MSI ), and Twitter ( TWTR ).

Strategy View

Posted on by Randy Watts

Key Points:

S&P 500 gain of 4% and NDQC gain of 6% since the follow-through day (six weeks) compare favorably to historical gains after a correction (overall median is 3% after four weeks and 5% after eight weeks).

Looking at examples where the S&P 500 was up more than 3% after four weeks, we see it leads to better-than-normal 13-week performance. 

In nine instances, the median 13-week gain is 7%, versus a median gain of 4% for the other nine.

Sector-wise, expect more divergence from here. In those nine instances, the 13-week sector spread from best-to-worst averages +20%. Currently, it is only at 5%.

Long-term outperforming sectors like Retail, Health Care, and Staple have historically started better after a follow-through day but trailed off after the first eight weeks. Cyclical and commodity sectors have finished the strongest over the last five weeks.

Strategy View

Posted on by Randy Watts

Key Points:

S&P 500 Earnings

Expected to decelerate to 4% median earnings growth. Sales expected to be flat from Q1 at 4%. This would tie with 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 investor advisors are skewed bullish, at 53%, although not extreme (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.

Index/Sector/Stock Trends

Major indices are at or within 1% of all-time highs, as are six of 11 sectors (Utility, Staple, Retail, Financial, Tech, Cap Equip).

Growth stocks are acting well. Our Focus List count of 63 is well above the long-term average of 50.

There are however, more extended names than actionable names on our Focus List. The most extended are COUP, VEEV, CYBR, TEAM, PLNT, NOW, GLOB, and EEFT.

The actionable list includes AMD, COLD, EW, VIAV, DIS, and ILMN.

Global Markets Overview

Posted on by Randy Watts

Key points:

 

  • Global Index is consolidating. VT ETF is in the middle of two-month range after a ‘normal’ pullback. Retake of 50-DMA this week.
  • Market conditions skewed positive, 50-50 market direction indicator turned positive two weeks ago, now above 75%. 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, follow-through days in the U.K., Japan, Hong Kong, among several others; and on the EM side, follow-through days​​​​​​​ in Brazil and Taiwan.
  • U.S. market with a typical pullback after a larger-than-normal leg higher through April.
    • Follow-through day in early June – likelihood of success? Three potential scenarios.
  • U.S. market yield curve history and market seasonality ( weak ), versus favorable setup given first half gains.
  • Number of U.S. Focus List stocks back above long-term average.
  • Number of weekly breakouts in the U.S., developed, and emerging all back to 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, food/beverages, med-tech
    • Emerging ex-China: banks, consumer loans, real estate development, telecom, apparel/consumer
    • China: banks, food/food service/alcohol, medical service
    • Frontier: banks, telecom, cement, retail

Strategy View

Posted on by Randy Watts

Key Points:

Majority of global markets back in an Uptrend, but would like to see the proportion rise to 70%+ for more confidence.

Global indices ( Total World, Nasdaq, EFA, EEM, CSI 300 ) have all bounced, but are still just in the middle of two-month ranges.

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, payments/fintech 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.

Actionable names from these themes include E-Health (

), Fleetcor Technologies (

), Haemonetics (

), Microsoft (

), Workday (

), Wright Medical (

); Carl Zeiss Meditec (AFXX.DE; AFX GR),  Givaudan (GIVN.CH; GIVN CH), Haidilao Intl Holdings (HAIN.HK; 6862 HK), Sika (SIKA.CH; SIKA SW), Worldline (WLN.FR; WLN FP); B3 Brasil Bolsa Balcao (BMF.BR, B3SA3 BZ), Bank Central Asia (BCA.ID; BBCJ IJ), Bata India (BIN.IN, BATA IN), Hindustan Unilever (HDL.IN; HUVR IN), Lojas Renner (LE3.BR; LREN3 BZ), Muangtahi Leasing (MUTH.TH; MTC TB), Varun Beverages (VB1.IN; VBL IN); Aeir Eye Hospital (AEH.CN; 300015 CH), Inner Mongolia Yili Indl. Gp. (MNG.CN; 600887 CH), Jiangsu Expressway (JEX.CN; 600377 CH), Topchoice Medical Investment (ZTI.CN; 600763 CH).

Strategy View

Posted on by Randy Watts

Key Points:

  • Normal down wave of just over 7% for the S&P 500. Quick retake of 200-DMA is similar setup to December 2012. If we get a follow-through day from here, this is the most immediate bullish setup.
  • If we retrace and close down 9% or more from highs, this leaves three scenarios:
    • First follow-through day after that is successful. This has had a 55%+ success rate since 1971 (18 of 32 corrections).
    • 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).
  • A follow-through day could occur as early as Friday, and we remain hopeful that the worst is over given the continuing corporate profit cycle and reasonable stock valuations but remain wary of tariff impacts and lower forward growth expectations due to the three-month –10-year yield curve inversion.

Strategy View

Posted on by Randy Watts

Key points from the report:

 

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.

Focus List count ( 61 ) is healthy although down slightly from April highs.

Actionable ideas (buy): Advanced Micro Devices ( AMD ), Amazon ( AMZN ), Aon Plc ( AON ), Essent ( ESNT ), Union Pacific ( UNP ), Viavi ( VIAV ), Wright Medical ( WMGI ).

Strategy View

Posted on by Randy Watts

Key points from the report:

Indices have corrected around 4% to this week’s lows. Median corrections for 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 an historic extreme is Small Growth versus Large Growth, which reached -13% over a trailing one-year period recently. It has improved slightly since last week.