Te U.S. market is in a Confrmed Uptrend. Te S&P 500 and the Nasdaq continue to trade constructively above 200-DMA support, with three and two distribution days, respectively
Tag: Confirmed Uptrend
China A Shares
Te CSI 300 gained 6.52% for the week on heavily increased volume. Te market remained in a Confrmed Uptrend with one distribution day. China’s CSI 300 has extended 11% above the 200-DMA and we believe the index is due for a pullback as we see great resistance near the ~3,750 level. Te CSI 300 gapped up and surged 5.95% on Monday, making the next immediate support near the ~3,520 level.
European Focus
On Tursday, the Stoxx 600 recorded another good day, closing 0.48% in the green on a weekly basis. European markets are trading constructively, with the exception of the U.K. Te Stoxx 600, France, and Germany closed in positive territory on all days except Wednesday. We downgraded the U.K. to an Uptrend Under Pressure yesterday after it accumulated fve distribution days. We also upgraded Spain to a Confrmed Uptrend after it reached its previous rally’s high. Of the 17 indices we cover, 16 are in a Confrmed Uptrend, and one in an Uptrend Under Pressure
Market View
One of the factors fueling the recent U.S. stock market rally from the December 2018 low are investors’ hopes
that 2019 will represent the trough year in U.S. corporate earnings growth. Q1 2019 projections for a 2% drop
in earnings could mark the low point, as Q2–Q4 earnings are expected to grow 1%, 2%, and 9% respectively. If
growth re-accelerates into 2020 after a trough in 2019, the precedent points to strong 2019 gains.
Bloomberg Intelligence Chief Equity Strategist Gina Martin Adams notes there have been 13 previous earnings
cycles for the S&P 500 since 1950. In 11 of 13 instances, in the trough years for earnings growth, the S&P 500
had positive returns with an average return of more than +10%.
We note the already above-average wave, that is, the current rally leg with no intermediate down leg of 5% or
more, is close to 20% gains off December lows. This uptrend may be pricing in the aforementioned trough, in
which case a short-term pause would be beneficial for further gains.
Breadth has been very strong (~75% of NYSE stocks are above their 30-WMA, and ~90% of S&P 500 stocks are
above their 50-DMA), a bullish signal for further gains. However, while this level of breadth is typical in big
bounces, it is not usually sustainable. In the recovery from the last two major corrections (2011, 2015–2016),
the market experienced a similar spike in breadth. During the subsequent pause/pullbacks, which each lasted
approximately two months, the amount of divergence between stocks increased (less breadth). Despite a more
clear separation of winners and losers, the market continued higher thereafter.
US Focus
Te U.S. market is in a Confrmed Uptrend. Te S&P 500 and Nasdaq continue to trade constructively above their respective 200-DMAs with a low number of distribution days. 2,800 remains near-term resistance on the S&P 500, while the next level of resistance on the Nasdaq is 7,573. Breadth remains strong with nine of 11 O’Neil sectors trading above their respective 200- DMAs. Since the January 4 follow-through day, Transportation, Consumer Cyclical, Technology and Capital Equipment have all rallied more than 18%. Te majority of leading ideas also continue to act well, making higher highs or consolidating above individual support levels. We will need to see a severe price break in the major averages or a clustering of distribution to change our current positive outlook on the general market. We continue to recommend buying quality ideas as they emerge from consolidation, but also recommend to not chase ideas that have become too far extended from an ideal pivot point.
China A Shares
Te CSI 300 rose 5.43% for the week on increased volume. Te market remains in a Confrmed Uptrend with one distribution day. Te CSI 300 held above its 200-DMA and breached its previous high (~3,448) after a seven-week gaining streak. Its next resistance level is at ~3,594. Our conviction has improved, as the increasing number of Focus List ideas shows. Te market surged following the easing of China’s fscal and monetary policies, which is expected to boost liquidity. Optimism about China-U.S. trade negotiations and a continuous inflow of foreign capital also drove the rally. We emphasize the need to stay cautious and patient because the market could pull back as volatility picks up. Meanwhile, we recommend a selective approach, choosing stocks that are from leading industries and have strong fundamentals and great growth potential.
European Focus
On Tursday, the Stoxx 600 closed 0.40% above last Friday’s close. Te index is in a Confrmed Uptrend with fve distribution days. Tis week, the index continued to move toward its 200-DMA, which is a key resistance level. During the week, we moved Germany and Austria to a Confrmed Uptrend after they displayed strong price-volume momentum. Of the 17 indices we cover, 16 are in a Confrmed Uptrend and one is in an Uptrend Under Pressure.
Market View
Technically, U.S. markets have made great progress since the December 24, 2018 low. All major indices are in
a Confirmed Uptrend and have risen above their 50-DMA. The rally has been broad-based, with all 11 sectors
trading above their 50-DMA. Headwinds remain in the form of overhead supply (6–10% or more off highs in
most cases), some downward-trending moving averages, and 50-DMA that are nearly all still below 200-DMA.
Given the strength of the rally, we have several observations.
First, an 18% rally on the DJIA since December lows, with no 5% pullback, is higher than the average leg
of 14% (11% median) in a bull market, dating back to 1900. One leg is a 5%+ move in either
direction. A leg of a 15% gain immediately following a 15% loss, which we just had, is very rare,
occurring only four times prior to the current leg.
We expect volatility to resume, given the continuing macro uncertainty such as slowing European
economies, lower growth in China, continuing trade tensions between the U.S. and China, partisan
political conflict in the U.S., and slowing U.S. corporate profits. As a result, it seems unlikely that 2019
gains will continue without any counter-trend down legs.
In addition, while Q1 is the second-best quarter for gains, Q2 and Q3 are usually much weaker. In fact,
for the S&P 500, Q2 is normally up only +2% while Q3 is flat. In the third year of a presidential cycle,
those figures are +5.5% and -1.0%, respectively, but we wonder if January and February’s performance
has pulled forward some of the gains for the year.
While we are not preempting the move and will wait for price action to dictate a change in our bullish stance, it
would be historically in line for the markets to pause or retract some of their recent gains after earnings season.
We are already 49 days into the current rally. If there is a pullback from current levels, it would not be abnormal
to see a median move downward of roughly 6%. If the market did experience a typical “third-leg” pullback, it
would put the S&P 500 at approximately 2,600, slightly below its 50-DMA.
China A Shares
Te CSI 300 rose 2.81% for the week on sharply higher volume and the market remained in a Confrmed Uptrend. Trading activity and market sentiment have picked up signifcantly this week, mainly due to expectations for easing global liquidity from the slowing pace of interest rate hikes by the U.S. Federal Reserve, positive signals from China-U.S. trade talks, and China’s improving January trade data. On Friday, the CSI 300 fell 1.86% on heavy volume, ending its six-day gaining streak, as China’s January CPI and PPI y/y growth missed expectations. We acknowledge that the rally is still in early stages and we expect that volatility will pick up in the near term with markets at resistance. Te CSI 300 is currently testing its 200-DMA. We recommend accumulating positions in leading stocks that have strong fundamentals and great growth potential, but keep in mind the market is still early in the bottoming-out phase and could re-test support levels in the near term
US Focus
Te U.S. market is in a Confirmed Uptrend. Te S&P 500 cleared above its 200-DMA this week and now faces resistance at ~2,800. Te Nasdaq also closed above its 200-DMA on Friday and now faces resistance at ~7,500. Distribution remains low with multiple sectors participating in this rally. Ideas continue to act well, with leadership across numerous growth-oriented industry groups. We will change our current positive outlook on the general market should we begin to see technical damage to leading ideas, combined with a pickup in distribution.
