The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq continue to
consolidate gains, trading relatively flat over the last several sessions. We have yet to see meaningful
price progression since last week’s follow-through day that would give us more conviction in the
current rally. Further, we would like to see the Nasdaq regain its 50-DMA which continues to act
as resistance.
Tag: Confirmed Uptrend
Market View
Strategy View
Normal down wave of just over 7% for the S&P 500. The quick retake of the 200-DMA is similar to the setup in
December 2012.
Friday’s follow-through day gives us some confidence, given the continuing corporate profit cycle and reasonable stock valuations, but we remain wary of tariff impacts and signs of lower forward growth expectations coming from the 10-year to three-month yield curve inversion.
The first follow-through day working (new highs) has happened in 18 of 32 past corrections of
9% or more on the S&P 500. Because we were down just 7%, the precedent is not exact in the
current case, but the concept remains similar.
If we retrace and close down 9% or more from highs, this leaves two more scenarios:
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).
US Focus
The U.S. market has been upgraded to a Confirmed Uptrend. The Nasdaq staged a day four follow-through, rising 1.66% on volume greater than that of Thursday. The S&P 500 rose 1.1% and back above its 50-DMA, though on lower day over day volume. The next level of resistance is ~2,892 on the S&P 500 and the 50-DMA on the Nasdaq (7,856)
Market View
Strategy View
As U.S. indices continue to trade near all-time highs, we will take a look at some of the similarities and differences of stocks
that are near highs versus those further off highs.
We looked at 13 metrics within our data library and found medians of those metrics and looked at ranges of % off 52-week highs for each. In each column, green is the highest value while red is the lowest (except for EPS Stability Factor, where low-er is more favorable). The results are quite clear in that stocks nearer to highs are larger and have better EPS Ranks, EPS growth in the current quarter and estimates for 2019, better EPS stability, higher P/T margins and ROE, higher P/E ratios, and lower dividend payout ratios. Sales growth does not seem to be as big of a differentiating factor, nor does 2020 EPS growth estimates.
China A Shares
China’s market remains in a Confirmed Uptrend with three distribution days. The CSI 300 took
a pause for the short trading week and will reopen Monday. In the coming weeks, we are paying
close attention to the clustering of distribution days and whether the index continues to hold
above its 50-DMA (~3,800). Failure to do so would warrant a downgrade to an Uptrend Under
Pressure.
US Focus
Th e U.S. market is in a Confirmed Uptrend. Th e S&P 500 and Nasdaq found support at
their respective 21-DMAs on Th ursday, before gapping up and closing at the highs of the
session Friday. Distribution remains low at one day on the S&P 500 and three on the Nasdaq.
European Focus
On Thursday, the Stoxx 600 lost 0.60% and lost 0.52% for the entire
week. Today markets are trading higher and will likely close in the
green. Of the 17 indices we cover in Europe, three are in an Uptrend
Under Pressure and 14 remain in a Confirmed Uptrend. However, the
distribution day count remains high.
Market View
Strategy View
Index strength remains intact a third of the way through earnings season. Normal (~78% of S&P 500
companies) beats have occurred so far.
Style-wise, large growth continues to be the standout, up 20% year-to-date and 17% over one year.
Small growth is up 20% year-to-date, but only 5% over one year.
Notably, the top 10 stocks make up 35% of the large-growth (0IKT) index: AAPL, MSFT, AMZN,
FB, GOOG, GOOGL, V, HD, MA, and UNH. The top 10 stocks in the small-growth index only
make up 6%.
Technology, the leading sector over one year, is also more represented in large growth than any
other index, giving it another advantage.
Materials and Cyclicals look cheap on a forward multiple basis in both the S&P 500 and S&P 600
indices and could play catch-up if overall strength continues, but only Cyclicals is showing relative
improvement currently. Materials and Energy continue to lag far behind.
Health Care is sharply decelerating but is not yet at a historically extreme level of underperformance to
make for a successful reversion trade.
China A Shares
The CSI 300 declined -5.6% on lower-than-average volume this week, erasing gains made since the beginning of April. It is right above support at ~3,880. Four of five trading days were down days. The market remains in a Confirmed Uptrend with two new distribution days with lower-than average volume for a total of three. Most sectors began to show weakness but we didn’t see broad selling. Capital Equipment declined the most (-7.6%) for the week, Consumer Staple declined the least (-0.6%). CAFL Capital Equipment stocks SNY.CN, HOY.CN and CRC.CN saw strong selling. The next round of U.S.-China trade talks next week could be a near-term catalyst. We recommend staying patient and being ready to trim extended positions if they show technical deterioration.
Market View
Strategy View
According to Bloomberg, from 2008 to Q3 2018, S&P 500 companies have spent $4.9T on buybacks versus
only $3.4T on dividends.
Last year, partially fueled by lower corporate tax rates, S&P 500 constituents spent $770B purchasing
their stock; this year it’s estimated they will spend close to $1T. This means the S&P 500 will buy back
more than 3% of its outstanding market capitalization in 2019. Given that S&P 500 earnings are only
projected to grow +7% in 2019, shrinking the share base by 3% is significant.
Looking at a buyback proxy ETF (Invesco Buyback Achievers ETF-PKW, companies with at least 5% of
shares bought back in trailing 12 months), we note that buybacks as a group outperformed the S&P 500
from March 2008 to March 2015. But, over the past four years, that trend reversed.
Lower interest rates likely played a large role in this difference. The outperformance period began
as rates were lowered and ended when the Fed raised rates in 2015.
With the Fed currently on pause and talks of interest rate cuts picking up, the buyback group has
begun to outperform again.
When looking at individual names that buy back shares, not all are equal. The table below shows that
the best performers also have stronger growth (at the median level).
Interesting names that have both growth and 5%+ buybacks that performed well in the past year include
NTAP, CHDN, UNP, AWI, CRMT, UBNT, ORLY, GLW, SBUX, CSCO, and ATKR.
