Te CSI 300 rose 2.37% for the week on decreased volume. Te market remains in a Confrmed Uptrend, with two distribution days. We believe the market remains constructive while continuing to consolidate. In the context of easing liquidity and policy support in China, the overall upward tone of the market has not changed. We remain optimistic as long as the support holds, which is at ~3,600 for CSI 300.
Tag: Confirmed Uptrend
US Focus
Te U.S. market remains in a Confrmed Uptrend. Following strong gains on Tursday, the S&P 500 and Nasdaq pulled back sharply into support on Friday, closing at the lows of the session. Te S&P 500 is now testing its 21-DMA, which is rising to the 2,800 level. Te Nasdaq is trading 60 bps above its 21-DMA after erasing four straight days of positive gains. Tere remains a moderate number of distribution days, however, with no expiration for two weeks, we expect the number to rise. A further pick-up in distribution that takes the major averages below 21-DMA support could lead to consolidation in extended leadership.
Market View
Recent global economic data continues to be weak as evidenced by declining GDP projections from the
Organisation for Economic Co-Operation and Development (OECD). The intergovernmental organization
released its updated 2019 world economic growth forecast on March 6, cutting its global GDP estimates to 3.3%
from 3.5% in November 2018. Specifically, OECD cut its U.S. projection from 2.7% to 2.6%.
We believe investors have responded to this slower global growth outlook by increasing exposure to companies
with stronger secular growth profiles as opposed to cyclical ones. If we examine the leading O’Neil Industry
Groups over the last month, we see many of them are in the long-term growth areas of Technology and Health
Care, including Software, Semiconductors, Computer Networking, Telecom, and Medical Services. Indeed,
Technology, with 22 stocks, and Health Care, with six stocks, represent a combined 48% of the U.S. Focus List.
In addition, the lack of inflation in the U.S. means investors might be more willing to pay a higher multiple for
growth. The U.S. Labor Department’s figures released on March 12 showed only a 1.5% increase in CPI for the
last 12 months through February. This was the slowest rate of increase since September 2016 and a
deceleration from January’s +1.6% pace.
With the current S&P 500 P/E at 16.8x 2019 and 15.1x 2020 based on consensus Wall Street earnings
estimates, the U.S. stock market is not overly expensive, and is close to its five-year average of 16.4x. As a result,
we believe growth stocks can experience a multiple premium and possible P/E expansion in the current
environment.
The U.S. market has been moved back to a Confirmed Uptrend. The S&P 500 and Nasdaq cleared above a
longer-term range of resistance on Friday. The next level of resistance is ~2,864 on the S&P 500 and ~7,873
on the Nasdaq, where both indices originally broke below their respective 50-DMA last October 2018.
Distribution stands at five days on the S&P 500 and four on the Nasdaq, with one additional day expiring on the
S&P 500 at next Thursday’s close.
Seven sectors are now trading above their respective 200-DMA after the strong rally this week. Technology
continues to lead with multiple industry groups including Software and Semiconductors back under
accumulation. Health Care has also come under recent accumulation after finding strong support at its 50-DMA
this week.
Leading ideas are acting very strong. Extended leadership continues to hit higher highs each day, showing few
signs of technical weakness, while new potential leaders continue to emerge from consolidation. We recommend
buying quality ideas at exact pivot points, while also locking in partial gains in ideas that have rallied 20–25% or
more from an ideal pivot.
China A Shares
The CSI 300 rose 2.39% for the week on decreased volume. The market remains in a Confirmed
Uptrend and distribution days are still at two. We remain optimistic the market will stay
constructive as long as key support holds and distribution days remain low. In the near term it is
normal for the market to pull back and begin consolidating, due to investors’ rising intention to take
profits, thus driving up market volatility.
US Focus
The U.S. market has been moved back into a Confirmed Uptrend. The S&P 500 and Nasdaq
cleared above a longer-term range of resistance on Friday. The next level of resistance is ~2,864
on the S&P 500 and ~7,873 on the Nasdaq, where both indices originally broke below their
respective 50-DMAs last October. Distribution stands at five days on the S&P 500 and four on
the Nasdaq, with one additional day expiring on the S&P 500 at the close Thursday.
European Focus
On Thursday, the Stoxx 600 closed 0.78% higher, resulting in
a gain of 2.14% on a weekly basis. The European market, along
with the Stoxx 600, continues to trade constructively today. We
downgraded Austria and Luxembourg to an Uptrend Under
Pressure Friday after they displayed signs of weakness.
China A Shares
The CSI 300 fell 2.46% for the week on greater volume, but it remains in a Confirmed
Uptrend with two distribution days. The index gapped down and declined 4% on Friday,
reversing the week’s prior gains, following disappointing Chinese import and export data and
news that regulators stepped in to crack down on illegal leveraged funds. Institutions giving
sell ratings to two financial stocks that led the gains during the rally, which rarely happens in
China A-share market, added to the panic. The CSI 300 failed to hold above ~3,750, with
the next level of support at ~3,500. We believe the mid-/long-term uptrend won’t change as
long as support holds and the number of distribution days remains low. If a third distribution
day occurs, we would shift the market to an Uptrend Under Pressure. We expect the market
to consolidate in the near term and recommend being cautious and keeping a close eye on
leading stocks with a robust growth outlook.
US Focus
The U.S. market is in an Uptrend Under Pressure. Indices pulled back and broke below
support at their respective 200-DMA after picking up three distribution days this week.
Distribution day count stands at six and five on the S&P500 and Nasdaq, respectively, with
the rising 50-DMA as the next level of support. Although indices are pulling back, the market
was due for a pause after a strong rally off the December lows.
European Focus
On Thursday, the Stoxx 600 closed 0.10% below last Friday’s close. It is in a
Confirmed Uptrend with six distribution days. This week, the index continued
to move along its 200-DMA, a key resistance level. All 17 indices we cover are in
a Confirmed Uptrend.
Market View
With earnings season nearly over, median S&P 500 sales and EPS grew 6% and 14% y/y, respectively. The
median beats were 0.4% and 2.6%, respectively. The EPS beat was the lowest in eight quarters.
• The best growth outside of Energy was in Capital Equipment and Transports. Consumer Staples had the
poorest growth.
• The best EPS beats were in Cyclicals, Retail, Transports, and Technology. The worst were in Financial and
Staples.
Q1 will likely be a second quarter of slowing growth, with the median expectations now at 4% for both sales and
EPS. These estimates have decreased sharply over 90 days.
• Growth in the second half of 2019 will need to accelerate to sustain the market uptrend. The current
consensus is this will likely occur.
Regarding the continued market strength: the 11% gain over the past two months is the eighth January/February
gain of +8% for the S&P 500 since 1970.
• In the seven prior instances, the S&P 500’s final 10 months performed above average.
• In two of those instances, 1975 and 1991, the S&P 500 began the year below its 200-DMA, as it did this
year. In those two cases, the S&P 500 gained 10% and 14%, respectively, in the final 10 months.
