Author: Kenley Scott

Key points:

• With falling yields, focus on dividend paying stocks is growing. The last time high-dividend payers as a group (SPYD) outperformed the S&P 500 was in 2016, in a similar period of sharply falling yields.
• We looked at a few subsets of dividend paying companies on the S&P 500 and found a few observations that were notable.
  • Eighty-five percent of companies currently pay a dividend, and eighty percent have paid one for the past five consecutive years.
  • Only 32% have grown their dividend the past five consecutive years.
  • A smaller number, 21% (105 companies), have grown their dividend the past five consecutive years and have a current payout higher than that of the overall S&P 500 (1.9%).
  • Two final subsets are 1) companies that have grown their dividend the past five consecutive years and have a current payout higher than the overall with at least 8% annual EPS growth for five years (53 companies); and 2) companies that have grown their dividend the past five consecutive years and have a current payout higher than the overall with less than 8% annual EPS growth for five years (52 companies).

Key points:

• As volatility has picked up in the U.S. the past several weeks, defensive sectors have been the relative leaders. Utility and Consumer Staple are the only two sectors out of 11 that are still above their 50-DMA. Health Care and Retail, a mix of defense and growth, are below their 50-DMA but are showing clear relative improvement as well.
• In terms of industry groups within Retail, 13 out of 18 have shown an improvement in Industry Group Rank over the past four weeks.
• Retail groups with the best combination of rank improvement and overall ranking include Retail/Whlsle-Automobile, Retail/Whlsle-Bldg Prds, Retail-Restaurants, and Retail-Major Disc Chains.
  • Favorable stock setups include Carvana (CVNA), Sonic Automotive (SAH), Lithia Motors (
    
    LAD

    ), IAA (IAA), Ashbury Automotive (

    ABG

    ), Kar Auction Services (

    KAR

    ), Target (

    TGT

    ), Costco (

    COST

    ), Walmart (

    WMT

    ), Home Depot (

    HD

    ), Floor & Décor (

    FND

    ), SiteOne Landscape Supply (

    SITE

    ), Wingstop (

    WING

    ), Starbucks (

    SBUX

    ), McDonalds (

    MCD

    ), Chipotle (

    CMG

    ), Denny’s (

    DENN

    ), Wendy’s (

    WEN

    ), Yum! Brands (

    YUM

    ), Restaurant Brands (

    QSR

    ), and Dunkin Brands (

    DNKN

    ).

While a global benchmark for stocks ( VT-Vanguard Total Stock ETF ) tests key support at February and May lows, we measure breadth in the U.S. and globally. In the U.S., just over 30% of NYSE stocks are above their 30-WMA. This is down from a peak of near 80% in April.

• This is a key test of whether we find a bottom somewhere near 20-30%, which is what occurred during pullbacks after the last two major market recoveries (2011-2012 and 2015-2016).

Globally, less than 30% of all stocks are above both their 50- and 200-DMA. A more healthy measure would be north of 50%.

• Sectors with outsized proportions above both their 50- and 200-DMA are U.S., Developed, and China Health Care; U.S. and China Staples; U.S. and Emerging Utilities; and Emerging Technology.

Key points:

• Historically, lower yields (U.S. 10-year at more than two-year lows) have meant expanding stock market P/E ratios. This could translate into either a rising market with flat or positive earnings or a falling market with even more sharply falling earnings.
• Because Q3 and Q4 2019 earnings estimates for S&P 500 companies are still being lowered, we think there could be some lag time before a possible higher market P/E, assuming earnings do at least stay flat or recover. The market focus on downward revisions and macro-uncertainty could be present for some time.
• Q3 is historically a weak quarter during the third year of a presidential cycle, while the rest of the year is typically strong. Though the market gained in July, we would not be surprised to see more seasonal weakness.
• Short-term market action is weakening and we have become incrementally more cautious, at least until the volatility settles.

Key points:

• The U.S. small-cap Russell 2000 index is lagging the S&P 500 by close to 15% over the past year. In addition, it is still 10% off highs while the major indices are well into highs.
  • This week, it did perform well, and we will be watching closely to see of the recent broadening of the market translates to small-cap performance.

Key points

• In the 18 instances since 1970, where a ‘first follow-through day’ led to new highs post-correction, the market gained at least 3% in the first four weeks nine times.
  • In those nine times, the market went on to average a 7% gain over a 13-week period post follow-through day.
  • In the current example, the Nasdaq and S&P 500 gained 5% and 4%, respectively, in the first four weeks.

• Sector spread of 5-6% currently since the June 7 follow-through day will most likely widen substantially over the next two months.
  • In the nine instances, the spread between the best and worst sectors was nearly 20% on average over 13 weeks post follow-through day.
  • Current trends favor Retail, Technology, and Material, while Utility, Energy, and Health Care are lagging.

Key points:

• Crude oil prices are forming a sort of wedging pattern on a daily chart. A break in either direction could dictate the next major move for the commodity and the energy sector as a whole.
• While the sector is above its worst trailing six-month performance, it is still lagging the S&P 500 by double digits over the most recent six-month period.
• While we think it remains too early to become aggressive in overweighting Energy, investors should prepare for possible outperformance. Given the sector’s extremely small weighting in the S&P 500 (5% currently, versus 15%+ ten years ago), a timely bet could pay off in terms of alpha versus the benchmark.
  • Looking at S&P 500 Energy companies, there are not many within range of new highs. The median percent off 52-week highs is 30% and only four stocks ( OKE, KMI, CVX, APC ) are within 10%. This again shows that it is too early to be aggressive.
  • But, should the sector continue its turn, we think a few stocks setting up now could be contenders to outperform both the sector and the broader market. These include FANG, HES, and PSX. Outside of the S&P 500, positive setups include GPRK, PBRA, TGS, SUN, EPD, USAC, and PARR.