Uptrend Under Pressure: /span>
The U.S. market is in an Uptrend Under Pressure. The S&P 500 and Nasdaq reversed off earlier gains in the week and are again testing support at the October/November lows. Support remains between 2,532 and 2,600 on the S&P 500 and between 6,630 and 6,830 on the Nasdaq. We will downgrade the market to a Downtrend when and if the Nasdaq undercuts 6,830.
This remains a risk-off market. Defensive ideas and groups continue to lead, with few growth ideas acting well. Following Friday’s action, Utility is now the only sector trading above its 50-DMA. Cleaning Products, Food, Beverages, Utility, and Telecom make up the majority of the Top 10 ranked Industry Groups. Further, the action in Banks has been very concerning, with many now testing 2016 highs and erasing all 2017 gains. Our seven Bank Industry Groups are now trading a median of 22% off highs, with the 78 S&P 500 Financial stocks (not including Reits) trading a median of 24% off highs.
We maintain our cautious view of the general market and do not recommend increasing risk until we see better technical action across the major averages, growth-oriented sectors/industry groups, and risk-on ideas. Action remains wide and loose with multiple levels of major resistance to clear before a new constructive trend, higher, can develop.
The U.S. market is in an Uptrend Under Pressure. The S&P 500 and the Nasdaq reversed off 50 and 200-DMA resistance this week and are again whipsawing back and forth with no clear direction. Should the indices undercut the October lows (S&P 500: 2,603; Nasdaq: 6,830), the November 28 follow-through day will officially fail, resulting in a market downgrade to Downtrend. Conversely, if the S&P 500 and the Nasdaq can rally off the lows, and clear and hold above their respective 50- and 200-DMA, we will move the market status back into a Confirmed Uptrend.
Within the S&P 500, ~65% of stocks are trading below their respective 200-DMA and a median of 24% off highs, indicating poor internal action and a lack of leadership. Eight of 11 O’Neil sectors are also trading below their 200-DMA after failing at that level Tuesday. The three sectors trading above the 200-DMA are Utility, Consumer Staple, and Health Care.
This backdrop warrants a cautious approach. Leadership is thin and breadth is narrow. We need to see indices tighten up and regain moving average support, and leadership broaden before we can recommend increasing risk in a more meaningful way.
The U.S. market is in a Confirmed Uptrend. The Nasdaq staged a day 5 follow-through day Wednesday, and has since consolidated
gains constructively. The S&P 500 also rallied strongly, and similarly has consolidated those gains constructively for the last two ses-
sions. Both indices are now facing resistance at their respective 50 and 200-DMA.
Technical action among growth ideas has been strong. Multiple risk-on ideas are now forming the right side of their respective ba-
ses, however, many are now also facing price and/or moving average resistance. Forty-three Nasdaq 100 stocks are trading below
their 50-DMA, despite rallying a median of 4% over the last five sessions.
To gain conviction in this new follow-through day, we will need to see both the major averages and ideas regain moving average
resistance over the next several sessions, which should lead to a broadening of leadership. Conversely, if we see the major averages
and ideas begin to fade at these levels, the follow-through day is at risk of failing.
Our recommendation is to gradually increase risk, buying only high-quality growth ideas that are breaking out of earlier-stage bases.
As the market progresses through resistance, additional ideas will emerge for new buying opportunities. We anticipate our U.S. Fo-
cus list count to increase when and if the market progresses higher.
Key Points from the latest Strategy View
• 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.
• 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. But, when two follow-through-day failures have
occurred (undercut of lows before new highs), each time this has led to a bear market.
o Bears have an average of six failed follow-through days before lows.
Stocks on our U.S. Focus List: Current Sentiment
Our USFL of 38 ideas gained 4.7% on average this week, underperforming the S&P 500 (+4.8%) and the Nasdaq (+5.6%).
Actionable Focus List ideas: Aon ( AON ), Astrazeneca ( AZN ), Canada Goose ( GOOS ), Chefs’ Warehouse ( CHEF ), Ciena ( CIEN ), Dr Red-
dys Labs ( RDY ), Edwards Lifesciences ( EW ), Fabrinet ( FN ), Horizon Pharma ( HZNP ), Johnson & Johnson ( JNJ ), Livent ( LTHM ), Mi-
crosoft ( MSFT ), Nextera Energy ( NEE ), Planet Fitness ( PLNT ), PRA Health Sciences ( PRAH ), Procter & Gamble ( PG ), Rogers Communi-
cations ( RCI ), Starbucks ( SBUX ), Unitedhealth ( UNH ), Veeva Systems ( VEEV ), Zoetis ( ZTS ).
- Eight developed and eight emerging markets are in or close to bear market territory. Additionally, two U.S. sectors are there, and four more are relatively close.
After worsening in the first half of 2018, all Old Media industry groups recovered in the second half of the year, and now rank among the top 30 positions in our 197 Industry Groups (IG).
The Media-Radio/Tv (IG Rank 7) and Telecom Svcs-Cable/Satl (IG Rank 15) are now in the top 20 in our IG ranking.
The New Media value chain continues to evolve. Netflix still leads the way in OTT streaming, but the upcoming launches of comparable platforms such as Disney+ in late 2019 will change the competitive landscape.
Internet stocks continue to be under pressure, led by FB (March 20 removal) and GOOGL (November 19 removal). Other Internet names, including YELP, MTCH, GRUB, and ROKU, declined sharply following disappointing earnings results or guidance.
Stocks detailed in this report include: DIS, CMCSA, VZ, NFLX, FB, TWTR, and RCI/B.CA (the latter is on our Focus List). In Asia, Info Edge (
), PVR (
), Studio Dragon (
), and VGI Global Media (
- VIX all-time low weekly average of 11 in 2017. 2018’s average is around 15 so far, but still well below the 28-year average of 19.
- Current levels of just above 20 are elevated but have not spiked during the most recent selloff and retest of November lows (February’s spike was to ~50).
- Expectations should be for elevated volatility until a resolution to the upside (indices back above 50-/200-DMA) or a major capitulation event.
Q3 GDP second estimate unaltered from its advance estimate.
The Bureau of Economic Analysis released its Q3 second estimate for real GDP at 3.5% y/y, confirming the growth figures released in the advance estimate. Net trade continues to act as the the biggest drag during this quarter.
Q3 GDP advance estimate takes a downturn.
The Bureau of Economic Analysis released its Q3 preliminary estimate for real GDP at 3.5% y/y, a steep decline from
the four-year high figure of 4.2% in September. Net trade, which made the highest contribution in the last quarter,
turned into the biggest drag in this quarter.
Q2 GDP estimate unchanged:
The Bureau of Economic Analysis kept its Q2 third estimate for real GDP unchanged at 4.2% y/y, the highest growth
rate since the third quarter of 2014. Net trade made the highest contribution during the quarter, while inventories
posed the biggest drag.
Argentina: Uptrend Under Pressure
Brazil: Uptrend Under Pressure
U.S.: Wabco Holdings (WBC), Hyatt Hotels (H), Penske Automotive (PAG), Lithia Motors (LAD), Cypress Semiconductor (CY), United Parcel Service (UPS)
Developed: Solvay SA (SOL.BE; SOLB BB), Sandvik (SAND.SE; SAND SS), Cyberagent (CYBA.JP; 4751:JP), Greencore Group (GNC.GB; GNC LN), Finecobank Spa (FCBK.IT; FBK:IM), Canadian Tire (CTC/A.CA; CTC CN), Morrison(Wm)spmkts. (MRW.GB; MRW LN), Fujifilm Holdings ([email protected]; 4901 JP)
Emerging: Nan Ya Plastics (NYP.TW; 1303 TT), Cathay Financial Holdings (CFC.TW; 2882:TT)
Stocks worth focusing on in this week’s Global Laggards:
Hyatt Hotels (H) — Consumer Cyclical; $7.5B market cap — manages owned and franchised Hyatt Branded properties across the world.
Revenues have been declining for the last three quarters and are expected to continue to do so in the upcoming quarter.
Institutional fund ownership has been steadily declining the past year.
The Company operates in the upscale segment. Amidst slowing occupancy growth, in line with our call in August, the Company is far more exposed to a downturn than its peers. Also, its business model is overly dependent on owned and leased properties, with more than 70% of revenues coming from the such properties, giving Hyatt little flexibility.
The Company has one of the lowest adjusted EBITDA margins in the industry, which adds to its lack of resilience in a downturn.
The stock’s A/D and RS Ratings have been steadily declining and are currently at E and 38, respectively, indicating increased selling pressure.
On Monday, we shifted several APAC markets to an Uptrend Under Pressure as markets continued to pull back below their 50-DMA. Markets have recovered somewhat, but we are now more cautious due to the choppy action along with an increase in distribution days. Only two markets (Indonesia and the Philippines) are in a Confirmed Uptrend, while the majority are either Under Pressure or in a correction. Despite this volatility, emerging market performance continues to improve relative to the S&P 500. Related APAC markets have held up while U.S. markets have declined in the short term.
In our note, we revisited our take on the China A-shares market, which is Under Pressure and in bear market territory but found support above October lows. There are still very few (17% of liquid stocks) trading above the 200-DMA but among them, Capital Equipment stocks comprise the most at 19%. The sector is also displaying short-term momentum, noticeable in our Sector Rotation Graph. Out of those trading above the 200-DMA, we provided the best ideas to keep on your radar should Capital Equipment begin to lead. Lastly, we highlighted our Focus List idea, China Railway Construction (CRC.CN; 601186: CH), which recently broke out to 2018 highs and is currently actionable.
TREND WATCH & ASIA WATCH
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.