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:

Q4 sales and earnings growth is set to slow from the first three quarters of 2018 after downward revisions in nearly every sector over the past 90 days.

Median sales estimates of 4% and EPS estimates of 11% for S&P 500 companies would be slowest in seven and six quarters, respectively.

Median EPS estimates have fallen 2% in 90 days for the S&P 500 and 4% in 90 days for the S&P 600.

Index and sector trends heading into earnings are much improved (all major indices in a Confirmed Uptrend), however, the overhang of downward-trending moving averages and, in most cases, 10% or more before new highs remains.

U.S. Focus List count of mainly highly-rated growth stocks is up from a low of 24 in December to 30 but remains below the healthier total of 40+. We are hopeful earnings season will be better than anticipated and will result in a substantial increase in the number of stocks on our list.

Strategy View

Posted on by Randy Watts
Key Points:

The second follow-through day on the S&P 500 index occurred last Friday. Progress over the next four to 13 weeks will be critical if the bull market is to continue. A second undercut increases the likelihood of a bear market.

U.S. Q1 seasonal setup is good, with strong average gains in the third year of a presidential cycle.

In both U.S. and European markets (many of which had follow-through days on Friday), still a lack of breakouts and actionable names, although the extremely low numbers have risen recently.

Actionable U.S. names include PLNT, WING, TEAM, and VEEV.

Developed actionable names include CPR.IT, AFXX.DE, NST.AU, and VITA.HK.

Emerging is better off, with more markets above their 200-DMA (Brazil, India, the Philippines, Indonesia, and Qatar) and more actionable names, although the overall breakout count is still low. Actionable names include TIT.IN, HDL.IN, CVC.BR, BMF.BR, and BCA.ID.

Strategy View

Posted on by Randy Watts

Key Points:

Historical U.S. Q1 averages are strong, in fact, the second best among the four quarters. The S&P 500 is up 3% on average in Q1s since 1970.

In third years of presidential cycles, averages are much better. The S&P 500 has averaged an 8% gain in third-year Q1s since 1970.

Retail and Tech have the best sector averages, up 13% and 12%, respectively, in third-year Q1s. When Tech has struggled, averages have also been much weaker.

If the market begins Q1 below its 200-DMA (four cases: 2003, 1991, 1979, 1975), the S&P 500 average is still excellent, up 12%.

Given negative S&P returns in Q4, historically January is up 2.4% on average (11 instances) but Q1 is down 2.0% on average.

In the two cases when this coincided with third years of presidencies (1995 and 1979), both January and Q1 returns were positive.

Strategy View

Posted on by Randy Watts
Key Points:
  • After the S&P 500 recently undercut October lows, we are once again looking for a follow-through day. The Nasdaq undercut and a second follow-through day already occurred.
    • If the second follow-through day were to fail and the S&P 500 made a new low, we would suspect that, based on history, we have entered a bear market and multiple follow-through days will be required to turn the tide.
    • Conversely, if we do get a second follow-through day, which translates to gains over 4/8/13 week periods, this would be much more in line with past bull market corrections (including those that took two follow-through days to eventually exit from a correction).
  • In the report, charts for each of the bear markets since 1971 are included. Key similarities (with the exception of 1987) include several failed follow-through days and an undercut of prior lows, a rolling over of 200-DMA, the 50-DMA breaking and staying below the 200-DMA, bear market rallies back to or to just above a downtrending 200-DMA, and an eventual spike in volume for several weeks as the bear markets come to an end with a final follow-through day that leads it out.

Strategy View

Posted on by Randy Watts
Key Points:
There are three main categories that encompass 27 prior instances when the S&P 500 has fallen to 9% or more from highs and closed below its 200-DMA since 1970.

Overall Takeaways

Forward gains post-follow-through day in bulls are substantially better. If the market struggles for the forward four/eight/thirteen weeks post-follow-through day, this has typically been a bad sign.

One follow-through day failure is fine, in fact, outcomes are even better (table #2). But, when two follow-through day failures have occurred (undercut of lows before new highs), each time this had led to a bear market.

Bears have had an average of six failed follow-through days before lows.

Strategy View

Posted on by Randy Watts

Key Points:

  • Even as global markets remain generally weak, there are at least 10 global themes that are working (at least a couple of Focus List names and other watchlist names showing constructive action): Global Digital Payments, Brazilian Tourism and Travel, U.S. Discount Stores, Global Medical Products/Equipment, Indian Generic Drugs/Biopharmaceuticals, U.S. Cloud Service Adoption, Global Athletic/Active Lifestyle, the Global Cannabis Opportunity, Norway Salmon Farming, and Middle Eastern Banks.
  • The two with the highest number of Focus List ideas are Global Digital Payments (10) and Global Athletic/Active Lifestyle (nine).
  • Currently actionable Focus List ideas from the 10 themes include Fast Retailing (RETA.JP; 9983 JP), Asahi Intecc (AS@H.JP; 7747 JP), Marine Harvest (MHG.NO; MHG NO), Localiza Rent-a-Car (LOC.BR; RENT3 BZ), CVC Brasil (CVC.BR; CVCB3 BZ), Makalot Industrial (MIK.TW; 1477 TT), Qatar National Bank (QNB.QA; QIBK QD), Divi’s Laboratories (DVL.IN; DIVI IN), Biocon (BBB.IN; BIOS IN). All of these markets except Taiwan are in a Confirmed Uptrend. Still waiting on U.S. market.

Strategy View–Correction Update

Posted on by Randy Watts
Key Points:

This has been an okay earnings season after one-third of S&P 500 companies have reported.

79% beat EPS and 65% beat revenue estimates. However, median beats are a bit less than in the prior three quarters.

Reactions are weak, not great, with a median loss of 0.7% across all companies. Eight of 11 sectors have a median loss.

Partly due to forward estimates, which are now coming down a bit leading into the first half of 2019.

Now that the S&P 500 has moved to 10% off highs this week and has clearly closed below the 200-DMA, we take a look back at similar corrections.

Since 1970, the S&P 500 has sustained 10% or greater corrections (from 52-week highs) and closed below its 200-DMA before then continuing in a bull market on 22 occasions (see charts in report).

Conversely, a 10% or greater correction and a close below the 200-DMA has turned into a bear market on five occasions (see charts in report).

Keys differences include the direction of the 200-DMA and whether the index is forming a series of lower highs and lower lows or is able to establish lows.

Strategy View

Posted on by Randy Watts

ELECTION JITTERS:

Recently, the U.S. equity market has followed its normal midterm election year script and begun a pullback. As noted in our Strategy View dated September 13, 2018, normally the stock market corrects in Q3 or Q4 in front of the election by
an average of nearly 10%. Afterward, the equity market erases the drawdown and rallies an average of 7% in Q4. Given the low level of volatility and strong returns in Q2 and most of Q3, it is not surprising that U.S. equities have pulled
back in early October. In addition, a lack of fundamental stock news has also contributed to the recent weakness. This will end as Q3 earnings season begins. Despite the Fed tightening rates and the constant noise from trade talks and
disturbingly partisan politics, we believe U.S. stocks will continue to take their direction from earnings trends.

Strategy View

Posted on by Randy Watts

Key Points:

  • Even with relationships at extremes (U.S. with a large lead over international benchmarks), there have been no major changes or reversions yet. U.S. large caps are taking back the lead from small caps. One issue is that there are seven distribution days on the NDQC, but it is holding strong above its 50-DMA.
  • U.S. sectors are similar, with Retail still at an historically extreme level of outperformance versus the S&P 500 and the laggard sector, Staples.
  • Of international markets, Japan, Norway, France, Italy, and Korea/Taiwan have more actionable names now, while India has dropped from leadership.

Strategy View

Posted on by Randy Watts

Key Points:

Nearly two years into President Trump’s first term, S&P 500 gains are the second best (after FDR) of the last 15 first presidential terms on a six-month, one-year, and two-year basis.

Also fairly abnormal are the very strong S&P 500 gains (+45%) since Republicans took control of all three branches of government in 2016. A one-party takeover has led to weak average market returns in the past.

The normal weak seasonality in midterm election years (Q3) has been absent thus far in 2018.