Author: Kenley Scott

Key points:

• With market volatility increasing, it could be timely to look at dividend and earnings growers.
• Earnings growers have sharply outperformed dividend payers for the past year, but looking for a combination of dividend/dividend growth (>1.8% dividend) and growth for five years, earnings growth (+7% or more over five years), >65 RS Ratings, positive money flows, and trading above the 200-DMA yields a solid list of 36 companies within the S&P 500.

Key points:

• Of 68 names in our Alternative Energy Industry Group (outside of China), the median current RS Rating is 85 and the median 52-week % change is 44%.
• Factors driving gains for the group include cheaper costs of projects (better technology, lower input costs, low interest rates) and a growing push by governments to decrease fossil fuel usage.
  • Notably, a majority of new wind/solar projects from 2020 on will produce cheaper forms of electricity than any coal, oil, or natural gas option.
• While other forms, including biomass, geothermal, hydro, and fuel cell storage, will likely grow as well, we favor wind/solar project developers/operators.
• We have 10 Focus List picks in the segment, with top large-cap picks NextEra ( NEE ) and Orsetd ( DEN.DK ) and small-/mid-cap picks Neoen ( NEOP.FR ), Solaria ( SEM.ES ), and Omega Geracao ( OM3.BR ).

Key points:

• To continue the comparison with the past two strong market cycles (post 2015-2016 correction and post 2011-2012 correction), we think that value, cyclical, small-cap, and international stocks need to enjoy a longer period of outperformance than they have had thus far. We believe a pickup in growth likely needs to be the driver.
• We think a likely test of whether these segments can gain substantial ground versus the S&P 500 will be if/when the U.S. market has some sort of correction or period of consolidation. A key tell in the past cycles was that these segments actually rose on a relative basis in the 2016-2017 and 2012-2013 pauses/pullbacks in the U.S.

Key points:

• The O’Neil market-cap weighted global Technology sector ( WS004.ZZ ) has risen 47% from December 2018 lows to this week’s highs, outpacing the Vanguard Total World Stock ETF (VT) by around 15%. Trailing 52-week gains of 35% are about 13% better than the VT.
• Gains in 13 of the past 14 weeks have lifted the index to 14% above its 40-WMA, the most extended it has been in 10 years.
• APPL, MSFT contributed more than 20% of the total gain. The 10 highest weighted stocks contributed more than one-third of the gain.
• Our Focus List is overweight Tech in the U.S. and Developed Markets and equal weight in Emerging Markets. Tech is the first or second highest weighted sector across each list for the first time in recent memory.
• We advise against chasing extended names and would trim some of the following: AAPL, AMD, NVDA, STM.IT, ASML.NL, SGL.KR. Restrict purchases to stocks just emerging out of new bases: TCNT.HK, DUM.KR, AVLR, QCOM, NOW RES.TW

Key points:

• In addition to the data we analyzed two weeks ago of the S&P 500’s typically weaker-than-average January following a 20%+ year, we looked at maximum drawdowns in those January periods and found an average of 4%, a bit higher than the average in all other years.
• Given that the S&P 500 reached nearly 9% above its 40-WMA this week, we looked at prior similar instances over the past seven years. Once the index is 9% or more extended, it has a negative average return for the first week and four weeks before turning back to positive over eight weeks and showing strong gains (with just a couple of exceptions) over the forward 13 weeks.

Key points:

• After a 20%+ year for the DJIA ( 34 years since 1900 ), the following January is up ~1% on average. However, excluding two years of double-digit gains, the average drops to 0.3%.
• After a 20%+ year for the S&P 500 ( 20 years since 1950 ), the following January is down 0.3% on average and is negative half of the time ( compared with one-third of other January periods ).
• The S&P 500 is about 9% above its 40-WMA. In the 2013-2014 and 2017-2018 bull runs it was only further above the 40-WMA in a handful of weeks.
• While we will wait for actual signs of weakness, including index distribution and the selling of leadership ideas, the backdrop suggests that investors be ready for a less smooth ride to begin 2020.

Key points:

• This week the number of stocks on the NYSE trading above their 30-week moving average ( 0NY30 ) rose to 71% (breadth), the highest figure since early May. The number had initially peaked at 79% in April after a sharp rally from December 2018 lows.
• For Nasdaq stocks ( 0ND30 ), the number reached 66% this week after an initial peak in April of 68%.
• We could be near a short-term peak, as breadth peaked at lower levels during each subsequent leg higher in past cycles.
• In the near term, we suggest that investors be selective in new purchases ( stocks just coming out of bases, FB, ENTG, YNDX, SPLK ) and not chase extended stocks ( NVDA, AMD, CPRT, etc. ), buy stocks coming out of sloppy bases, or buy poor fundamental quality ideas simply because they are rising ( VSH, WOR, RAD, etc. ).