Author: Kenley Scott

Key points:

S&P 500 Earnings:

Expected to decelerate to 4% median earnings growth. Sales expected flat from Q1 at 4%. This would tie with Q1 2019 for the slowest sales growth since Q4 2016 and would be the slowest earnings growth since Q1 2016. and earnings to grow +4%.

However, we expect a normal beat of 3-4%. The bigger key will be to see if the trend in downward revisions after earnings comes to an end. Forward earnings have been consistently revised lower since September 2018.

Into the beginning of the season, the VIX is low, at 13, and investor advisors are slanted bullish, at 53%, although not an extreme level (60%+).

Given a falling 10-year bond yield (historically inverse relationship with market P/E ratio), the market’s multiple should expand. Unless forward earnings are much worse than expected, this could fuel a push further into all-time highs.

Key points:

After a huge and consistent lag versus large U.S. growth, several styles outperformed this week (global, small U.S., value U.S.). While very short-term in nature, one signal of this is a pause in extended leaders.

There are 60 stocks above a $100M market cap that are extended. Each is at least 20% above their most recent pivot on a weekly base, with the median 37% above. They are up a median of 75% year-to-date.

These stocks skew larger than the overall universe, with a median market cap of $7B, and have a median RS Rating of 98. They also have median current quarter sales and EPS growth of 25% and 33%, y/y, respectively. Their median FY20 P/E ratio is 37.

Four-fifths are from just 10 O’Neil Major Industries (of 88 Industries in total). The most prevalent of these are Computer Software, Financial Services/Payments, Comml Svcs, Med-Tech, Biotech, Insurance-Brokers, and Aerospace/Defense.

This week, 15 were down at least 3.5%, while just eight were up at least 3.5%. Those that were down the most were among the most extended. The 15, MELI, TTD, VEEV, SHOP, SE, MKTX, GLOB, OKTA, SBAC, PRO, ZEN, FDS, ARWR, AVDR, and GSB, were a median of more than 40% above the most recent pivots entering this week.

The best weekly stock performers, those up at least 5%, were also a median of 22% off highs.

Cyclical, Transport, Material, and Capital Equipment saw an outsized proportion of weekly outperformers (versus their overall % of stocks).

These stocks had a median market cap of just $1.7B and a median RS Rating of 63.

They also had median sales and EPS growth in the recent quarter of just 6% and 3%, y/y, respectively. Further, their median FY20 P/E ratio was just 12.

While not O’Neil growth stocks, a few of these weekly outperforming names with reasonable growth, and with favorable chart setups include OFG, FBP, NGVT, CHEF, IBP, AROC, ESE, TMHC, BLD, PUMP, CKH, RCL, and SYBT.

Key points:

• The number of stocks breaking out of periods of consolidation ( bases ) is once again above average.
• The first spikes across regions came in late February and early March, several weeks after market lows had been established. Over the subsequent three months, the number of weekly breakouts has come down from highs but still remains well above late-2018 lows (forming a pattern of higher lows).
• This week, that number is back above average across all the major subsets (U.S., Developed, Emerging, China).
• Given better market conditions and accelerating number of breakouts, we believe now is the time to get more aggressive with growth stock purchases.

Key points:

The most striking similarities and differences of strength and weakness on a global basis:

Similarities

Utilities, telecom, and food and/or beverage are strong globally.

Steel and autos/parts are weak globally.

Payments is strong in each subset except China/Frontier.

Real estate development is strong in each subset except U.S./Frontier.

Differences

Developed banks are weak, while Emerging/China/Frontier banks are all strong.

Developed tech is strong, led by software, but is weak in Emerging/China.

Energy, mostly oil & gas, is weak everywhere except Frontier, where it is strong.

In conclusion, we find global utilities, telecoms, and food/beverage, U.S./Developed/Emerging payments and financial services, Emerging/China/Frontier banks, Developed/Emerging/China real estate development the current broadest areas of strength.

Key points:

Friday follow-through day in the U.S. on the Nasdaq Composite. Software remains among the best segments.

Globally, another Technology space, Telecom, is acting well across multiple regions and industry groups with the sector.

High RS stocks are listed below.

Developed Markets

U.S./Canada: Motorola Solutions ( MSI ), Cien ( CIEN ), Viavi ( VIAV ), Cogent Communications ( CCOI ), BCE ( BCE.CA ), Cable One ( CABO ), Charter ( CHTR ), Dish Network ( DISH ), Sprint ( S ), etc.

APAC: Telstra ( TLS.AU ), China Tower ( CHTW.HK ), HKT Trust ( HKTL.HK ), Hikari Tsushin ( HIKI.JP ), Vision ( VISN.JP ).

Europe: Swisscom ( SCMN.CH ), Tele2 B ( TEL2.SE ), Elisa ( ELIS.FI ), Telecom Plus ( TEP.GB ), Infrastrutture Wireless Italiane ( INW.IT ), Ericcson ( ERIC.SE ), Telenor ( TEL.NO ).

Emerging/Frontier Markets

Africa: MTN Group ( MTNJ.ZA ), Telkom SA ( TKGJ.ZA ), Naspers Spinoff, Multichoice Group ( MCGJ.ZA ), Safaricom ( SAF.KE ).

Middle East: Saudi Mobile Telecom ( ZAI.SA ), Saudi Telecom ( STC.SA ).

Asia: Jasmine ( JASM.TH ), Globe Telecom ( GLA.PH ), Time Dotcom ( TIDO.MY ), Reliance ( REL.IN ).

Europe: Play Communications ( PLY.PL ), Cyfrowy ( CYF.PL ), Orange Polska ( ORK.PL ), Hellenic Telecom ( HTO.GR ), Rostelecom ( RTK.RU ).

Key points:

William O’Neil + Co. has the U.S. equity market in a Downtrend.

We are now looking for the market to establish a bottom and hold for three trading days to shift the U.S. to a Rally Attempt, followed by a follow-through day where the market rises +1.7% or more.

The U.S. market is not giving encouraging technical signals. Currently only 43% of NYSE stocks are trading above their 30-WMA after peaking at 79% in April.

While this is a major decline, we do not believe it is low enough to represent a bottoming process in the market. Over the last 20 years, this metric has tended to reach 13-30% before rebounding.

Similar scenario with the Nasdaq. Currently only 39% of stocks are above their 30-WMA after peaking at 68%, with an historic rebound range of 10-25%.

Key points:

We shifted several markets into a Correction this week, including the U.S., Spain, Indonesia, and the Philippines. While a slight majority of developed markets are still in an Uptrend (or Under Pressure), this week was the first shift to a majority of emerging markets to Correction since the week of October 26, 2018 (29 weeks).

In addition to the U.S. downgrade this week, developed Asia (except Australia/New Zealand) and developed Europe are in precarious positions, mostly 1–2% away from downgrades as well.

Given the weakness, it is important to focus on the pockets of strength that do exist, both in terms of stocks to potentially hold through the volatility and those to buy when market conditions improve. In many cases, the relative strength leaders during pullbacks will continue to lead during rallies.

Pockets of strength currently include software and payments in the U.S.; food, beverage, and specialty chemicals in Europe; food, beverage, and medical services in China and Hong Kong; Financials in India and South Africa; airports, freight-related, and airlines across several markets; oil/gas in Russia; and stocks from varying industries in Australia.

Key points:

We have 72% of global markets classified in an Uptrend, a decrease from 89%+ the past two months.

The 19 consecutive weeks with a majority of markets in an Uptrend in will be tested next week, as several more markets are 1-2% away from downgrades to a Downtrend. Meanwhile, if support holds (many at or near their 50-/200-DMA), the trend could persist. We remain cautious until one of these two scenarios plays out.