The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq gapped up into new year-to-date highs yesterday, before pulling back intraday and closing at the lows of the session. Should the indices pullback over the next few days following this churning action, look for support at the 200-DMA to hold.
Symbol: LPTY.HK
WON Global View
The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq continue to trade constructively above their respective 200-DMA with a low number of distribution days. Near-term resistance on the S&P 500 remains at 2,800, while the next level of resistance on the Nasdaq is 7,573.
Market View
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.
WON Global View
The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq continue to consolidate gains, pulling back yesterday but again closing off intraday lows and avoiding distribution. Though there has been some near-term rotation, all 11 sectors are up over the last five sessions, with nine of 11 remaining at or above their respective 200-DMA. Leading ideas also continue to display positive technical action, digesting gains constructively. We remain positive on the general market as we have yet to see technical damage at the index, sector, or stock level despite what has been an above average rally without a 5% pullback. See last week’s strategy view here.
Global Focus Developed
Australia’s ASX All Ordinaries Index rose 1.52% this week. The index remains in a Confirmed Uptrend with no distribution days and is trading 5.61% above its 50-DMA and 2.44% above its 200- DMA.
WON Global View
The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq traded relatively flat yesterday, consolidating gains over the last
several sessions. Distribution remains at two days on the S&P 500 and one on the Nasdaq. Nine of 11 sectors remain above their
respective 200-DMA, though we are noticing early signs of rotation into Basic Material, Energy, and select Transports as Technology
digests gains.
WON Global View
The U.S. market is in a Confirmed Uptrend. The S&P 500 and Nasdaq continue to push higher with a low number of distribution days. We will now be looking for the 200-DMA to act as support should a pullback occur. Breadth remains strong, with nine of 11 O’Neil sectors now trading above their respective 200-DMA. Leadership continues to act well, with multiple ideas across numerous growth-oriented industry groups making new highs. We remain positive on the general market.
WON Global View
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.
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.
