The U.S. market is in a Confirmed Uptrend. The S&P 500 cleared above its 200-DMA last week and now faces resistance at ~2,800. The Nasdaq regained its 200-DMA on Friday, with the next level of resistance at ~7,500. Overall price volume action remains constructive as both indices continue to grind higher with a low number of distribution days. Further, multiple sectors are participating in the rally with eight of 11 now above their respective 200-DMA. Ideas continue to act well, with leadership across numerous growth-oriented industry groups. We will change our current positive outlook on the general market should we begin to see technical damage to leading ideas combined with a pickup in distribution.
Symbol: CREE
Market View
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.
WON Global View
An 18% rally on the DJIA since December lows, with no 5% pullback, is higher than the 14% average (11% median) leg in a bull market, dating back to 1900. One leg is a 5%+ move in either direction.
A leg of 15% gain immediately following a 15% loss is very rare, occurring only four times prior to the current leg. A ~6% pullback is typical following these v-shaped recoveries.
Earnings estimates continue to come down, with GAAP S&P 500 earnings now expected to decline 2% in Q1 2019.
While the seasonal setup remains strong (Q1 in the third year of a presidency and strong January gains), macro uncertainty combined with the above average rally from lows could soon test our current bullish stance.
WON Global View
The U.S. market is in a Confirmed Uptrend. The S&P 500 cleared above its 200-DMA, while the Nasdaq touched that level and then reversed to close at the lows of the session, albeit in light volume. Look for the major averages to avoid distribution and for leading ideas to hold above individual support levels should the major averages pull back off current levels.
WON Global View
The U.S. market is in a Confirmed Uptrend. The S&P 500 is now touching resistance at its 200-DMA, while the Nasdaq is trading 60bps below that level. Six of 11 O’Neil sectors are now trading above their respective 200-DMA, with Capital Equipment, Technology, and Transportation regaining that level yesterday. Breakouts continue to increase, and leading ideas remain healthy. We maintain our positive view on the general market.
WON Global View
The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq continue to consolidate constructively below resistance along their respective 200-DMA. Distribution remains at two days on the S&P 500 and one on the Nasdaq. All 11 O’Neil sectors remain above their respective 50-DMA. Leadership remains healthy, with new ideas across multiple industry groups making new highs each session. We remain positive on the general market.
WON Global View
The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq are consolidating constructively below resistance along their respective 200-DMA. Distribution stands at two days on the S&P 500 and one on the Nasdaq. Five sectors have rallied more than 10% since the January 4 follow-through day with all 11 trading above their respective 50-DMA. Leadership continues to act well with multiple breakouts occurring each week. To remain constructive, we would like to see the major averages avoid a clustering of distribution and for leadership to continue to broaden. We maintain our positive view on the general market.
Market View
Strategy View
U.S. indices found resistance this week at their respective 200-DMA. Given the rapidity of the market’s recent
ascent and the amount of overhead supply, it is not surprising the S&P 500 and Nasdaq paused when hitting
this moving average.
While a sideways move or small pullback from here would be normal action, we do not want to see a sharp
move downward accompanied by an increase in distribution days from the indices’ failure to move through the
200-DMA on this attempt. Importantly, we do not want to see a move below the low of the January 4 follow-
through day, as this would be a very bearish signal.
Overall, the market has been mixed the last two weeks. While technically stocks have acted better, both in terms
of price and breadth, and growth sectors have been leading, the fundamental earnings picture for U.S.
companies has continued to weaken. Forward earnings estimates have fallen to such a degree that the Street
now forecasts a roughly -1% earnings comparison y/y for Q1 2019. This is in marked contrast to consensus
expectations this past fall for +8% earnings growth in Q1 2019.
Presently, U.S. markets are in a Confirmed Uptrend according to our disciplined O’Neil Methodology, which
combines technical, quantitative, and fundamental aspects of analysis. However, whether this current move is
merely a tradeable rally within an overall negative market cycle or the beginning of a new bull run remains
unknown. We urge clients to remain alert to possible changes in the environment as we feel volatility will remain
high for the time being.
The U.S. market is in a Confirmed Uptrend. Indices pulled back this week after hitting resistance at the 200-
DMA. The distribution day count increased by one and stands at two days on the S&P 500 and one on the
Nasdaq. Despite the small rise in distribution, price action across leading stocks remains constructive. While
consolidating below the 200-DMA, we would need to see indices avoid a clustering of distribution days for us to
remain bullish on leading stocks.
Sectors: Leading sectors over the trailing four weeks include Capital Equipment (+6%), Technology (+6%),
and Transportation (5.7%), while Retail (0.2%), Energy (+0.3%), and Material (+1.4%) are lagging.
Industry Groups: Since the January 4 follow day, multiple groups have participated in the rally. Software
continues to lead with five groups ranked in the top 15, including the top three groups. Other leaders includes
Aerospace/Defense, Insurance Brokers, Computer-Tech Services, Telecom, Electronic Measuring, and Payment
Processors.
Ideas: Although indices are pulling back, leadership continues to exhibit constructive price action. Positive traits
of leading stocks include pulling back to price or moving average support on quiet volume or bucking the trend
and rallying higher on above average volume. Examples includes Coupa ( COUP ), Trandigm ( TDG ), Xilinx
( XLNX ) and Autodesk ( ADSK ).
WON Global View
The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq declined ~1% on volume greater than the prior day as each index picked up a distribution day in the process. Despite the sell-off, the majority of leading stocks pulled back in constructive fashion. To maintain a positive outlook, indices need to avoid a clustering of distribution days. Currently, the distribution day count remains low with only two days on the S&P 500 and one on the Nasdaq.
WON Global View
The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq pulled back off on below average volume and thus avoided a distribution day. Indices continue to face resistance along the 200-DMA, however, price action remains constructive.
