O’NEIL RESEARCH

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GLOBAL OUTLOOK

Downtrend:

Rally Attempt:

Confirmed Uptrend:

Uptrend Under Pressure: /span>

Europe Detail
Asia Detail

FEATURED

Market View

Market Overview

The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq continue to hold above the Febru-ary 14th follow-through day (FTD) with one distribution day each. A handful of leading ideas have been able to push into higher highs (PLNT, MB, TAL, OLLI, NOW, PSTG, RHT, GRUB, RNG, etc.), though most ideas continue to build the right side of new bases. Following our discipline, we continue to recommend a slow approach, gradually committing capital to actionable ideas as the Confirmed Uptrend remains intact.
Stocks on our U.S. Focus List: Current Sentiment Our USFL of 74 ideas (four additions) gained 2% on average this week, outperforming the S&P 500 (0.5%) and the Nasdaq (1.4%).

By Sector

Since the February 14th FTD, Technology and Utility are leading, rising nearly 3% each. Most of the Utility move was made Friday after the sector jumped more than 2%. Within Technology, MB broke out on earnings this week, turning actionable. ON and CY also both regained their respective 50-DMAs. Conversely, Energy, Con-sumer Staple, and Retail are lagging since the FTD, all flat to down 1%. Within Energy, NEP, NBLX, and CDEV continue to lag, while FANG remains a leader, regaining its 50-DMA. Within Retail, WING pulled back to its 50-DMA post-earnings, while HD reversed lower off its 50-DMA and is now forming a new base.

MARKET VIEW

Market Overview

The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq continue to hold above the Febru-ary 14th follow-through day (FTD) with one distribution day each. A handful of leading ideas have been able to push into higher highs (PLNT, MB, TAL, OLLI, NOW, PSTG, RHT, GRUB, RNG, etc.), though most ideas continue to build the right side of new bases. Following our discipline, we continue to recommend a slow approach, gradually committing capital to actionable ideas as the Confirmed Uptrend remains intact.

Stocks on our U.S. Focus List: Current Sentiment
Our USFL of 74 ideas (four additions) gained 2% on average this week, outperforming the S&P 500 (0.5%) and the Nasdaq (1.4%).

By Sector

Since the February 14th FTD, Technology and Utility are leading, rising nearly 3% each. Most of the Utility move was made Friday after the sector jumped more than 2%. Within Technology, MB broke out on earnings this week, turning actionable. ON and CY also both regained their respective 50-DMAs. Conversely, Energy, Con-sumer Staple, and Retail are lagging since the FTD, all flat to down 1%. Within Energy, NEP, NBLX, and CDEV continue to lag, while FANG remains a leader, regaining its 50-DMA. Within Retail, WING pulled back to its 50-DMA post-earnings, while HD reversed lower off its 50-DMA and is now forming a new base.

Market Overview
The U.S. market was upgraded to a Confirmed Uptrend on Wednesday. The market staged a Day 4 follow-through and continued higher to close the week. We now view the 50-DMA as short-term support on both the S&P 500 and Nasdaq. Multiple risk-on ideas are again making new highs, while new ideas are emerging from consolidation. We continue to recommend gradually buying high-quality growth ideas with sound technical pat-terns now that the market is back in a Confirmed Uptrend. Signs of a failing follow-through day include a clus-tering of distribution shortly following the move, coupled with failed breakouts in individual ideas.
Stocks on our U.S. Focus List: Current Sentiment
Our USFL of 70 ideas (three additions) gained 6.2% on average this week, outperforming the S&P 500 (4.3%) and the Nasdaq (5.3%).

By Sector
Technology recovered the quickest over the last five sessions, jumping ~6%. Software is leading the sector, with multiple groups trading back at new highs. RNG, PAYC, RHT, QTWO, ADBE, TYL, NOW, CRM, and RP all moved back into new highs. Health Care is also improving on a short-term relative basis. ABMD jumped into all-time highs on positive news, ALGN regained its 50-DMA, and new additions IDXX and EW are both breaking out of multi-month consolidations.

Market Overview
The U.S. market was downgraded to Downtrend on Monday. The S&P 500 and Nasdaq broke below their re-spective 50- and 100-DMAs on heavy volume this week. The 200-DMA is now acting as support for both indi-ces. We will move the market into a Rally Attempt should the S&P 500 and Nasdaq hold above Friday’s lows for a minimum of two days. From there, we will be looking for a follow-through day (as early as Wednesday) before moving the market back into a Confirmed Uptrend. We continue to recommend a patient approach, waiting for the follow-through day and for more ideal technical set-ups in individual ideas before buying.
Stocks on our U.S. Focus List: Current Sentiment
Our USFL of 67 ideas (eight removals) lost 5.4% on average this week, underperforming the S&P 500 (-5.2%) and the Nasdaq (-5.1%).

By Sector
All 11 O’Neil sectors are below their respective 50-DMAs, with four trading below their 200-DMAs. Over the last five sessions, all sectors expect Utility are down more than 5%. On a relative basis, Utility, Consumer Staple, and Consumer Cyclical are improving on a short-term relative basis, while Energy and Transportation are weaken-ing.

SECTOR SUMMARY

Key points from this week’s commentary:

*   In the seven prior periods (1970-2006) when the U.S. Federal Reserve raised interest rates multiple times with no decreases in between, commodities usually sharply outperformed stocks.
*   The Energy and Material sectors have the best averages for equities, but Energy has a weak median gain (due to two periods with huge gains). Materials and Health Care have the best median performance.

*   Since December 2015, when the Fed raised rates from 0.75%, they have been raised four additional times, to 2.0% currently. Three or four 2018 hikes are expected.
*   Commodities are outperforming as they normally do, as is the Basic Material sector. However, Energy has been very weak despite crude gains, and Health Care has uncharacteristically underperformed.

Some highlights from the report:

Since our last Capital Equipment Sector report in December, we have added two stocks and removed 10, largely due to technical breakdowns of the stocks amidst the global market correction in late January.

The stocks added were: FLIR Systems ( FLIR ) and United Tractors ( UTR.ID ). The stocks removed were: Eagle Materials ( EXP ), Pulte Group ( PHM ), and U.S. Concrete ( USCR ) in the U.S.; Alimak Group ( ALIG.SE ), Breedon Group ( BREE.GB ), and Elbit Systems ( ESL.IL ) in EMEA; and Beijing Enterprises Water ( WANO.HK ), Bharat Electronics ( BHE.IN ), Hirata ( HIRT.JP ), and Scientex ( STEX.MY ) in APAC.

In this report, we screened for potential winning Capital Equipment stocks in the U.S., EMEA, and APAC regions.

Our top Focus List picks are: AIG.TW, FLIR, HEI, KOMN.CH, PMET.MY, and UTR.ID.

U.S. Market Posts Follow-Through Day
Global Markets Recap
Twenty-two developed markets gained 2.8% on average following the major decline over the last two weeks. Five markets are in an Uptrend Under Pressure, the other 17 are in a Downtrend (including nine in a Rally Attempt).
• EMEA and APAC markets all bounced after sharp losses last week. Outperformers included Hong Kong, Finland, Denmark, and France, which rose 3.9-5.5% apiece.

Twenty-four emerging markets gained 2% on average, recovering from earlier in the week. Nineteen markets are in a Confirmed Uptrend (including 11 Under Pressure), while five are in a Downtrend. In the 60th consecutive week with a majority in an Uptrend, sentiment is better than in developed markets, but remains subdued.
• Russia, South Africa, Brazil, and China led, gaining 3.6-6.6% apiece.
U.S. Leads Quick Recovery
U.S. indices gained back all of the prior week’s losses, which were their worst weekly drops in more than two years. The DJIA, S&P 500, and Nasdaq indices all neared or touched 40-WMA support before bouncing. The Nasdaq led with a 6% gain, retaking its 10-WMA in the process. It had what we call a follow-through day (>1.7% gain on volume greater than the prior day) on February 14, so we shifted the market status back to a Confirmed Uptrend. While still 3% below alltime highs, it is 10% off intraday lows from January 26. We know historically that every follow-through day does not lead to sustained gains, however, we view it as a valuable indicator to begin buying stocks once again. Signals of a rally failure would include a clustering of market distribution and an undercut of the lows from the follow-through day (NDQC: 6,977) over the next couple of weeks.

ECON SUMMARY

Caution Advised as Global Sell-Off Takes Hold, Recent FL Removals, Dali Foods

In just one week the MSCI Asia has pulled back below the 50-DMA. Volatility to the downside has picked up and the A/D trend has shifted negatively along with our sentiment. With nearly all APAC markets (11 of 13) either in an Uptrend Under Pressure or Downtrend, we are more cautious on the region overall. (This week we downgraded China, South Korea, and Japan to Downtrend.) Over the last few weeks we pointed out how extended markets were becoming and hoping for a period of constructive consolidation that would indicate healthy market action. It’s become obvious that we are in a pull-back scenario, but the violent action in global markets over the last few days has us questioning overall market health. Nonetheless, our intent is to remain objective considering the severity of price action and distribution count, which are both shifting negatively. This week, we reviewed Focus List removals since November to revisit the technical sell signals in price/volume action we noticed at the time. We also revisited (for a second week) the number of failed breakouts and provided names on our Focus List that are holding up better on a relative basis (instead of Actionable). Overall, we recommend continuing to trim extended names and do not recommend buying stocks during current market volatility. In markets that are in a Downtrend, we recommend raising cash if possible or taking a defensive approach.

Q4 GDP rate at 2.6% after two consecutive quarters of more than 3%.
As per the advance estimate by the Bureau of Economic Analysis, Q4 GDP increased 2.6% y/y, below consensus.
Economists were expecting 3% y/y increase for the third consecutive quarter. Higher imports anchored the Q4 rate.
2017 GDP rate stood at 2.3%, compared with 1.5% and 2.9% in the previous two years. Median GDP growth rate
forecast for 2018 was increased from 2.1% to 2.5%.

GDP rate above 3% for two consecutive quarters.
As per the third estimate released by the Bureau of Economic Analysis, Q3 2017 GDP rate grew 3.2% y/y
(consensus was at 3.3%), compared with 3.1% and 3.3% in Q2 2017 and Q3 2017 (second estimate),
respectively. Median GDP growth rate forecast for 2018 was increased from 2.1% to 2.5%.

EQUITY RESEARCH

China in Confirmed Uptrend with Caveats

We are upgrading Mainland China markets to a Confirmed Uptrend as the Shanghai and Shenzhen gained 2% and 1.9%, respectively, today, on higher volume than yesterday. The CSI 300 (see Datagraph) has also displayed similar action. Considering the follow-through day, we recommend a gradual approach to buying stocks, with a few caveats:

• Chinese Markets are still testing key resistance levels. All major indices are still below their respective 50-DMA which could serve as major resistance. Furthermore, markets are still well below 52-week highs, the lowest among all APAC markets. To stay bullish, look for a break above moving averages as a first signal and for indices to hold above them for additional confirmation.

• Volume is still lighter than average. Accumulation volume came in heavier than Wednesday’s light pre-holiday volume, but it is lower than the 50-day average and much lower than the heavy distribution days earlier this month. There could still be significant overhead to fight through and volatility could remain high. To stay bullish, look for increasing accumulation volume which would indicate greater support for a move higher.

• Stock Leadership. Stock leadership and breakouts as markets gain further momentum would be bullish. Keep a close eye on stocks that are rising above and holding their 50-DMA. Stocks that hold up the best during corrections are strong candidates in our view. On the bearish end, we do not want to see these stocks (RS of 90 or above) break down further below moving averages. We have provided a list of ‘A’ share names (see page 2) to keep on your radar.

Global Laggards

Heetae Kim, Feb 22, 2018

This report has been curated by our sector analysts to find stocks showing technical weakness. We believe these stocks are laggards relative to their own domestic markets. We recommend that they be underweighted as they may be vulnerable to further downside risk and underperformance. 

Stocks worth focusing on in this week’s Global Laggards:

U.S.

Pricesmart (PSMT) – Retail ($2.4B market cap) – Operates membership warehouse clubs in Central America, the Caribbean, and Colombia.

  • The stock is finding near-term resistance along its 10-WMA and has lagged performance-wise over the past three years. Its RS line is currently making new multi-year lows and its A/D Rating has deteriorated to D-. We believe shares will trend lower to test multi-year lows near ~$68.50.
  • The Company has frequently missed consensus earnings expectations. It missed consensus EPS expectations in four consecutive quarters, all resulting in sharp selloffs following results.
  • Q1 FY 2018 results were disappointing, with the Company reporting EPS of $0.74, versus consensus of $0.85. Gross margin dropped 40bps on a decision to lower prices in Central America and the Caribbean to drive revenue.
  • Despite a low store base (39 warehouses in FY 2017), the Company’s pace of expansion has been very slow at roughly two new openings a year. Additionally, most markets in which the Company operates seem to offer few store count growth opportunities.
  • As the world turns digital, the Company will have to increase investments in omnichannel offerings that may put pressure on profit margins going forward.
  • Fund sponsorship peaked in November 2016.

Strategy View

Randy Watts, Feb 22, 2018

Earnings continued to surprise positively, coming in 3.9% better than expectations (versus a 3.3% beat in Q3). Even though the U.S. economy has had a long economic expansion, both revenues and earnings accelerated sequentially in Q4 2017 versus Q3 2017. Revenues rose 8% versus 6% in the previous quarter and earnings rose 15% versus 9% in the previous quarter.

  • All sectors showed median sales growth acceleration from Q3, and all but Health Care showed better EPS growth.
  • Aided by an improving global macro economy, a weak dollar, and a lower forward 2018 corporate tax rate, 2018 S&P 500 earnings estimates have been revised higher by 5.1% and now call for 17% earnings growth for the year.
    • Sectors with the biggest upward revisions were Transports, Financials, and Energy.
  • The highlighted theme is the impact of the weakening U.S. dollar, especially against the Euro and other European currencies. Companies with high revenue exposure to Europe continue to outperform the S&P 500.
  • Fundamentally, we particularly like the companies that are forecast to have high 2018 EPS growth combined with the potential to lower their 2018 tax rate and/or benefit from the weak U.S. dollar. Of these, currently actionable U.S. Focus List names include: EW, FLT, IDXX, MS, and TEAM. Other names that fit the trends but are not currently actionable include FLIR, GOOGL, ILMN, and PRAH. We would encourage investors to explore these names as they are currently in the sweet spot of these three trends.

FOCUS LISTS

Feb 24, 2018

The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq continue to
hold above the February 14th follow-through day (FTD) with one distribution day each. A
handful of leading ideas have been able to push into higher highs (PLNT, MB, TAL, OLLI,
NOW, PSTG, RHT, GRUB, RNG, etc.), though most ideas continue to build new bases.
Following our discipline, we continue to recommend a slow approach, gradually committing
capital to actionable ideas with the Confirmed Uptrend remaining intact.

Feb 23, 2018

The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq continue to hold above the February 14th follow-through day (FTD) with one distribution day each. A handful of leading ideas have been able to push into higher highs (PLNT, MB, TAL, OLLI, NOW, PSTG, RHT, GRUB, RNG, etc.), though most ideas continue to build new bases. Following our discipline, we continue to recommend a slow approach, gradually committing capital to actionable ideas with the Confirmed Uptrend remaining intact.

Feb 23, 2018

This week through Thursday, the Stoxx 600 lost 0.17% after a 3% increase last week. Most markets, including the Stoxx 600, the U.K., France, Switzerland, and Germany, continue to remain in a Rally Attempt, and we did not witness a huge positive move on strong volume (follow-through day) that depicts the beginning of an Uptrend.

Feb 23, 2018

Australia’s ASX All-Ordinaries Index rose 1.67% this week. The index is trading 3.0% above its 40-WMA. It is currently in an Uptrend Under Pressure.

Feb 23, 2018

Mainland China’s markets continued to advance this week, led by the Shanghai, which gained 2.81% compared with 2.07% for the Shenzhen. On February 22, we upgraded Mainland China markets to a Confirmed Uptrend as the Shanghai and Shenzhen gained 2% and 1.9%, respectively, on greater volume. The CSI 300 has also displayed similar action. Considering the follow-through day, we recommend a gradual approach to buying. The Shanghai is trading 0.12% below its 200-DMA (~3,293), while the Shenzhen closed 6.91% below its 200-DMA (~1,907). The 100-DMA (~1,930) continues to act as a strong resistance level for the Shenzhen.

WHITE PAPERS

EPS Rank Study

Oct 12, 2016

In this paper, we examine the effectiveness of using William O’Neil +Co.’s proprietary Earnings Per Share (EPS) Rank as a primary factor in managing a portfolio of U.S. equities. Our study included nearly 12,000 U.S. equities from January 1995 to December 2015.

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