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GLOBAL OUTLOOK

Downtrend:

Rally Attempt:

Confirmed Uptrend:

Uptrend Under Pressure: /span>

Europe Detail
Asia Detail

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Market View

Market Overview

The The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq continue to trade in choppy fashion, closing back below their respective 50-DMA on Friday. We will be looking for each to regain that level early next week as a further break lower will likely result in a move back to the 200-DMA. This is a bifurcated market. Multiple ideas are still hitting new highs or consolidating constructively, while multiple other ideas, most-ly from lagging industry groups, are also gapping down to new lows post earnings. We continue to recommend a selective and patient approach, buying only leading ideas from leading and/or improving industry groups as they break out of sound price bases on heavy volume. Stocks on our U.S. Focus List: Current Sentiment Our USFL of 74 ideas (one net addition) gained 1.7% on average this week, outperforming the S&P 500 (+0.5%) and the Nasdaq (+0.6%).

By Sector

Energy remains the clear leading sector. CLR and WRD are now extended from a proper pivot, however FANG remains actionable after regaining its 50-DMA this week. Retail ideas continue to act well with AMZN regaining the 50-DMA, and WING, HOME, LULU, FND, OLLI, and FIVE all still trading at or near new highs. Financial closed the week strong, despite mostly sideways action. SCHW, TCBI, SIVB, FLT, SQ, and PYPL are all now back above the 50-DMA. Conversely, Technology closed back below its 50-DMA this week, following a big selloff in semiconductors. Multiple ideas including MRVL, MKSI, AMAT, and CY are all now back below their 50-DMA.

MARKET VIEW

Market Overview

The The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq continue to trade in choppy fashion, closing back below their respective 50-DMA on Friday. We will be looking for each to regain that level early next week as a further break lower will likely result in a move back to the 200-DMA. This is a bifurcated market. Multiple ideas are still hitting new highs or consolidating constructively, while multiple other ideas, most-ly from lagging industry groups, are also gapping down to new lows post earnings. We continue to recommend a selective and patient approach, buying only leading ideas from leading and/or improving industry groups as they break out of sound price bases on heavy volume.

Stocks on our U.S. Focus List: Current Sentiment

Our USFL of 74 ideas (one net addition) gained 1.7% on average this week, outperforming the S&P 500 (+0.5%) and the Nasdaq (+0.6%).

By Sector

Energy remains the clear leading sector. CLR and WRD are now extended from a proper pivot, however FANG remains actionable after regaining its 50-DMA this week. Retail ideas continue to act well with AMZN regaining the 50-DMA, and WING, HOME, LULU, FND, OLLI, and FIVE all still trading at or near new highs. Financial closed the week strong, despite mostly sideways action. SCHW, TCBI, SIVB, FLT, SQ, and PYPL are all now back above the 50-DMA. Conversely, Technology closed back below its 50-DMA this week, following a big selloff in semiconductors. Multiple ideas including MRVL, MKSI, AMAT, and CY are all now back below their 50-DMA.

Market Overview

The U.S. market is in a Confirmed Uptrend. On Tuesday, the S&P 500 and Nasdaq staged a Day 6 follow-through, giving the go-ahead to gradually buy high-quality stocks with strong sales and earnings as they break out of sound price bases. Going forward, we will be looking for the major averages to regain their respective 50-DMA and for upside volume to pick up as indices clear resistance. We will also be looking for leadership to broaden as the majority of leading ideas are currently consolidating ahead of earnings, with few yet to break out. Our confidence in the follow-through day will increase if we begin to see these factors play out over the next few weeks. Conversely, signs that this follow-through day will fail include a clustering of distribution coupled with failed breakouts in leading ideas.

Stocks on our U.S. Focus List: Current Sentiment

Our USFL of 73 ideas (including four additions) gained 2.9% on average this week, outperforming the S&P 500 (+2%) and the Nasdaq (+2.8%).

By Sector

Energy led all sectors by a wide margin this week. Recent USFL additions, CLR and WRD, are leading the Oil&Gas-U.S. Expl&Prod industry group, and both remain actionable at new highs. Technology ideas also led this week, with the majority of software names bouncing off their respective 50-DMA. These names include TEAM, SPLK, RHT, RNG, TYL, QTWO, ADBE, and PAYC. Semiconductors are still recovering with a few regaining their respective 50-DMA this week, including MPWR, AMAT, CY, ON, and MKSI. Conversely, Financial ideas have lagged this recent move higher. Banks, including MS, TCBI, WAL, and SIVB, as well as payment processors, WP, PYPL, SQ, and FLT, all continue to consolidate around their respective 50-DMA.

Market Overview

The U.S. market is in a Rally Attempt within a Downtrend. We are now looking for a follow-through day before shifting the market into a Confirmed Uptrend or, conversely, an undercut of Monday’s lows (S&P 500: 2,553; Nasdaq: 6,805) before shifting the market back into a Downtrend. The majority of U.S. Focus List ideas are still forming new bases. We continue to recommend a patient approach, waiting for the follow-through day and waiting for ideas to firm and present better, more risk-optimal entry points. We maintain our cautious stance on the general market.

Stocks on our U.S. Focus List: Current Sentiment

By Sector

Retail ideas on the U.S. Focus List continue to show strong relative strength, with multiple ideas moving into new highs this week. LULU and FND both broke into new highs are now extended from ideal pivots. FIVE remains actionable as it builds the right side of a new base, while OLLI and WING continue to hold above their respec-tive 50-DMA. The Consumer Cyclical sector bounced off the 200-DMA this week, leading to positive action among a handful of ideas on the USFL. SKX and NFLX both regained the 50-DMA before pulling back Friday, while PLNT bounced off that same moving average. Conversely, semiconductor ideas within Technology remain weak. AMAT, CY, MRVL, MPWR, NVDA, and ON are all living below their 50-DMA as they form new bases.

New Ideas or Deletions

We added Continental Resources ( CLR ) and removed Centennial Res Dvlp ( CDEV ) and Logmein ( LOGM ) from the U.S. Focus List this week.

SECTOR SUMMARY

Key Points from this week’s commentary

  • 50%+ of global markets back in an Uptrend, but still on shaky ground.
  • Looking for pockets of strength, biggest standout area continues to be Energy.
    • Crude gains helping most oil-dependent countries. The U.S., the U.K., Norway, Canada, Russia, Brazil, India, Saudi Arabia, and Colombia are all in the top 28 countries globally in terms of reliance on oil for growth (World Bank). Each of these markets is in an Uptrend.
    • Producers and field service companies are biggest gainers. Actionable names: Diamondback Energy (FANG), Parex Resources (PXT.CA), Ecopetrol ( ECO.CO ).
  • Smaller pockets of strength:

o Americas and Europe apparel manufacturers Kering ( KER.FR ), Canada Goose ( GOOS.CA ), PVH ( PVH ), and Puma ( PUMX.DE ) all actionable.

o U.S. and emerging market retailers from a few different specialties are actionable: At Home Group ( HOME ), Ollie’s Bargain Outlet ( OLLI ), Clicks Group ( CLSJ.ZA ), and Titan Company ( TIT.IN ).

o Utilities in several countries showing relative improvement over a few weeks: Smart Metering Systems (SMS.GB), Power Grid Corp of India ( PGC.IN ), Enn Energy Holdings ( XINA.HK ), China Gas Holdings ( IWAI.HK ).

Market Summary

 

The Ishares Dj Stoxx 600 continues its upward trend. Since we spotted a follow-through day on April 5, the index has broken above its 50-DMA and is now sitting at its 200-DMA. A majority of European markets are now in a Confirmed Uptrend, including France, Germany, and the U.K. New leadership has been emerging since. In this report, we highlight long and short ideas that have come to our attention this week: 

 

  • Basic Materials – Although momentum is deteriorating over four-weeks, Basic Materials has been the top performing sector in the past five days and remains a long-term (26-weeks) outperformer. The number of stocks clearing consolidation bases is also rising and inversely the number of laggards is diminishing. Although we do not currently have any names on our Focus List from the sector, we are closely watching Boliden ( BOL.SE, Ex-EFL ) and Stora Enso ( EGR.FI ).

 

  • Capital Equipment – With lagging and deteriorating short-term momentum, the number of ideas on our Focus List in the sector has been declining significantly in the past six months. Ongoing Q1 earnings season is not likely to help, as FX headwinds and raw material price increases are likely to continue to hit Capital Equipment companies across the region. We recommend Kone ( KNEBV.FI ) as a short due to weak demand persisting from China and the margin squeeze. Focus List name Vat Group ( VACN.CH ) and Teleperformance ( ROFR.FR ) are actionable. Top-rated small cap name Deutz ( DEZX.DE ) is actionable.

 

  • Consumer Cyclical – Cyclical remains one of the most interesting sectors when chasing growth stocks. Among the eight names we currently hold on our Focus List, top-rated names Kering ( KER.FR ), Technogym ( TGYM.IT ), and Puma ( PUMX.DE ) are still trading in a buy range. Outside of our Focus List, we are watching luxury names Richemont ( CFR.CH ) and Swatch Group ( UHRN.CH ) closely due to improving fundamental profiles on the back of the recovery of the Swiss watch exports indicator: +13% year-to-date, versus +2.7% in 2017. Both stocks broke out of consolidations recently and are actionable.

 

  • Consumer Staples – Worst performer over the past five days, Staples are also lagging over 26 weeks. Very few names would fit the type of growth we are looking for. From our Focus List, Oriflame ( ORIF.SE ) remains actionable. We also reiterate our positive view on AAK ( AAK.SE ). Shares are actionable, currently sitting at their pivot point. On the other side, Carlsberg ( CAB.DK ) has constantly hit our laggards list with technical characteristics deteriorating since February.

 

  • Energy – With short-term momentum on the rise, Energy is one of the leading sectors over 26 weeks. This global trend led our analyst team to increase the number of recommendations across the globe. In Europe, Schoeller-Bleckmann ( SCBL.AT ) was recently added and joined Rubis ( RUI.FR ) on our Focus List. Top-rated name Aker ( AKEP.NO ) is actionable.

 

  • Financial – Like in the U.S., European Financials are lagging over 26 weeks and short-term momentum has been declining. That said, we continue to see constructive trading action from exchanges, namely LSE ( LSE.GB ) and Deutsche Boerse ( DB1X.DE ) due to the return of market volatility. Both stocks trade constructively along their 10-WMA on rising RS line. We are closely watching Focus List name Julius Baer ( BAER.CH ) due to technical weakness and recommend buying Wirecard ( WDIX.DE post-earnings release this week.

 

  • Technology – The weakness in Technology over four weeks is largely reflected through the list of laggards that have grown significantly in recent weeks. EX-EFL names Autotrader ( AUTO.GB ) and Just Eat ( JE.GB ) are part of this list of vulnerable stocks in which technical indicators led to further downside. We recommend Autotrader ( AUTO.GB ) as a short idea.

 

  • Utilities – Although Utilities are unlikely to be overweight in the O’Neil Focus List due to the lack of growth characteristics and earnings instability, the strong momentum that has surrounded the sector in the past 10 weeks can’t be ignored. This is largely reflected through our list of vulnerable stocks (stocks displaying poor technical set-ups). There are no Utilities on this list this week. This rising momentum in Europe coincides also with the asset swap between E.On ( EOANX.DE ) and RWE ( RWEX.DE announced on March 12. The latter is actionable after breaking out of a 21-week cup-with-handle. The market seems to like RWE’s move toward renewables. From the sector, EDF ( EDF.FR ) recently hit our Top-Rated list. 

Some highlights from the report:

 

U.S. Retail (excl. Internet)

  • We have been seeing strength in Retail-Apparel ( IG Rank of 2 ). Focus on Lululemon Athletica ( LULU ), our top pick in Retail.
  • Bright spots in brick-and-mortar retailers with strong growth and large TAM. Bullish on Five Below ( FIVE ), Ollie’s Bargain Outlet ( OLLI ), Floor & Décor ( FND ), and At Home Group ( HOME ). OLLI is actionable.
  • Underweight Retail-Automobile group ( G5014 ).
  • Short Foot Locker ( FL ).

 

Int’l Retail (excl. Internet)

  • Retail sector in Europe has been weak. Focus on Amplifon ( AMP.IT ), which has been a strong outperformer.
  • APAC Retail sector has been strong. Focus on retailers in India. Top picks Avenue Supermarts ( AS.IN ) and Titan Company ( TIT.IN ). TIT.IN is actionable

ECON SUMMARY

Q4 GDP rate at 2.9% after two consecutive quarters of more than 3%.
As per the third estimate by the Bureau of Economic Analysis, Q4 GDP increased 2.9% y/y, 400bps higher than the second estimate. Economists had forecasted a 3% y/y increase for the third consecutive quarter. Median GDP growth rate forecast for 2018 was increased to 2.5% from 2.1%.

Q4 GDP rate at 2.5% after two consecutive quarters of more than 3%.
As per the second estimate by the Bureau of Economic Analysis, Q4 GDP increased 2.5% y/y, 100bps below the advance estimate. Economists had forecasted 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%.

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%.

EQUITY RESEARCH

Strategy View

Randy Watts, Apr 19, 2018

Global Markets

An 88 week stretch with a majority of 47 (46 until 1/1/2018) markets in a Confirmed Uptrend ended on March 19, 2018. During the stretch, the Russell Global Index gained 37% to its January peak and 30% from start to finish. For the purpose of displaying why the 50% threshold is key, we show the results of using a simple strategy of buying the Russell Global the day of a shift above 50% and selling once it breaks below.
The week of April 6, a large number of European markets had a follow-through day and were moved back into a Confirmed Uptrend. This took the percentage back to slightly above 50% where it remains currently. Since the latest shift, the Russell Global is up about 3%. We are cautiously optimistic that these gains can continue due to three factors. First, corporate earnings continue to improve, especially in the U.S. where Q1 2018 earnings season has started positively. Clients can refer to our Strategy View dated April 12, 2018 to see our expectations for Q1 2018 S&P 500 earnings. Next, while the Fed, BOJ, and ECB are all tightening, the rate cycle has been gradual and not caused any major dislocations. Finally, investor bullish sentiment has fallen from a record 17 straight weeks above 60% to the current level of 42%. As a result, we feel there is now a “wall of worry” that stocks can climb from present market levels.

Global Laggards

Heetae Kim, Apr 19, 2018

his 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.
Advanced Energy Industries ( AEIS ) – Technology ( $2.5B market cap) – AEIS designs and manufactures power conversion products that enable thin film manufacturing processes such as deposition and etch for various semiconductor and industrial products. Two semiconductor equipment manufacturers, Applied Materials ( AMAT ) and Lam Research ( LRCX ), jointly accounted for 57% of 2017 total revenue.
  • On Tuesday, April 17, shares of LRCX and other stocks in the semiconductor manufacturing ecosystem fell after LRCX gave a disappointing shipments outlook for the rest of 2018. Following this, AEIS broke below its 10-WMA on above average volume. The next support level is near $56 (January 2017 lows).
  • Shares have been in a steady decline since breaking below long-term support at the 40-WMA on December 1, 2017.
  • The Electronic-Semiconductor Equipment Industry Group’s Rank has fallen to 110 from 76 eight weeks ago (197 being the worst).
  • AEIS has a poor RS Rating of 15, and shares are now trading 35% off highs after topping in early November 2017.
  • The number of funds holding AEIS shares fell to 495 as of March 2018 from a record high of 510 as of December 2017.
  • Per consensus estimates, revenue growth is expected to decelerate from 39% in 2017 to 13% in 2018 and 5% in 2019.
 
Toll Brothers ( TOL ) – Consumer Cyclical ($6.3B market cap) – Builds detached and attached homes in luxury residential communities. The Company caters to move-up, empty-nester, active-adult, and second-home buyers in the United States.
  • The stock is finding resistance along its 10-WMA, which is now crossing below its 40-WMA. We see shares trending toward the lows of the last base formation along ~$37. A failure here could lead to the stock trading in the low $30s. The stock’s RS line is breaking down toward 52-week lows and the stock has a poor A/D Rating of D-.
  • Shares have been under pressure on growing concerns regarding increasing raw material costs and rising rates impacting affordability.
    • Increasing tariffs on lumber and other products are negatively impacting homebuilder sentiment, which fell 1 point to 69 in April. Lumber prices are reaching record highs and the Company will likely have to absorb some of these costs, which would negatively impact margins.
    • The industry has also been impacted by a shortage of skilled workers, which has been adding to costs.
  • We believe homebuilders as a group will continue to lag the U.S. equity market. The industry’s Group Rank has been worsening and is now 182 out of 197.

No Man’s Land, China Auto Selloff, Geely and Guangzhou, Indian Retail, Titan

The MSCI Asia is trading along its 50-DMA and has yet to find enough buying support to rise above this resistance level. Moreover, the index remains in a flat trend over the last five days and has yet to find a clear direction. Markets are trading in “no man’s land” and, until we get a clear trend, we remain cautious.

This week we downgraded Mainland China to a Downtrend but upgraded Singapore to a Confirmed Uptrend, leaving the majority (seven out of 13) APAC markets still in correction mode. Accumulation volume has been mostly lackluster for the majority of markets, but we remain open minded to the possibility of follow-through days, as five markets are in a Rally Attempt. It is difficult to be overly bullish (or bearish) in the current market conditions. The risk is being stuck in a whipsaw mentality, so a neutral approach may be the best option until there is a clearer trend. If you are in search of longs, we recommend sticking with leadership (RS near highs) and focusing on those markets (India, Korea, Taiwan) that remain in an Uptrend. Indian Retail names could be a good option. Recent addition Titan (TIT.IN; TTAN:IN) is still actionable. On the other hand, stay away from stocks that are displaying technical weakness. An example is auto-related companies in China (discussed below). Focus List name Geely Auto (MANR.HK; 175:HK) is under pressure while Guangzhou Auto (GAG.HK; 2238:HK) has declined further since its removal.

FOCUS LISTS

Apr 20, 2018

The U.S. market remains in a Confirmed Uptrend. The S&P 500 and Nasdaq continue to trade in choppy fashion, closing back below their respective 50-DMA on Friday. We will be looking for each to regain that level early this week as a further break lower will likely result in a move back to the 200-DMA. This is a bifurcated market. Multiple ideas are still hitting new highs or consolidating constructively, while multiple other ideas, mostly from lagging industry groups, are also gapping down to new lows post earnings. We continue to recommend a selective and patient approach, buying only leading ideas from leading and/or improving industry groups as they break out of sound price bases in heavy volume.

Apr 20, 2018

The iShares DJ Stoxx 600 continues its upward trend, closing the week with a small gain of 0.68%. Since we spotted a follow-through day on April 5, the index has broken above its 50-DMA and is trading just below its next level of resistance at the 200-DMA. A majority of European markets are now in a Confirmed Uptrend, including France, Germany, and the U.K. New leadership has been emerging and in our European Weekly Summary we highlighted several names that look attractive.

Apr 20, 2018

Australia’s ASX All Ordinaries Index increased 0.67% this week. The index is trading at its 40-WMA and is currently in a Rally Attempt.

Apr 20, 2018

Mainland China’s markets closed significantly lower over last week, led by the Shenzhen index, which fell 3.1%. We downgraded Mainland China to a Downtrend on April 17, as the CSI 300 (OCHSS300) fell to year-to-date lows. The number of distribution days has risen to four over the past five weeks and the followthrough day on February 22 has failed. We see 1,726 as the next level of support for the Shenzhen. We recommend a defensive approach for any fresh additions.

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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