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Editor’s note: Tony Dwyer, U.S. portfolio strategist for Canaccord Genuity, and his colleagues author frequent overviews of market conditions, technical factors, and their future market outlook. The following provides an edited excerpt from their April 11, 2019, report on the macro market outlook.
Q1 2019 earnings-per-share estimates look to be down for the first time since Q3 2016

The start to the Q1 earnings season began last week with earnings reports from a couple of key money center banks. We thought it would be good to highlight current SPX operating earnings estimates (source: I/B/E/S data from Refinitiv):

  • Q1 2019 EPS (earnings per share) growth is estimated to be down 2.5%, but we believe the end result might be a small positive. Since 2009, every quarter has been revised higher from the first day of EPS reporting season to the end by a median of 3.5%.
  • 84% of companies beating estimates. Of the S&P 500 companies that delivered Q1 earnings by April 11, 2019, 84% reported above-analyst estimates.
  • The Q1 2019 revenue growth estimate is 4.9%. The Energy and Technology sectors are the only two sectors expected to show slightly negative revenue growth.
All four intermediate-term indicators are moving back toward overbought levels

Our intermediate-term tactical indicators all reached an extreme oversold/pessimistic level in late December/early January and have since climbed back near overbought levels, as the SPX has advanced 23% off the Christmas Eve low (as of April 11, 2019). The extreme levels these indicators hit suggest that a cyclical low was set in December, but the current overbought level could lead to a brief pause in the upside.

  • The percentage of S&P 500 (SPX) Index components above their 10- and 50-day moving averages has surged. On Dec. 24, 2018, they were at 0.2% and 1.2%, respectively. The recent rally has the percentages at 71% and 80%, respectively (Figure 1), suggesting a solid breadth recovery.

Sources: Bloomberg, Canaccord Genuity. Data as of 4/11/19.

  • The VIX Index reversed from its late December spike. There was a significant jump in the CBOE Volatility Index (VIX), which surged to over 36 on Dec. 24, 2018. The VIX has since been trending lower and is back down to 13 (Figure 2). Ultimately, we expect it could drop back toward single digits.

Sources: Bloomberg, Canaccord Genuity. Data as of 4/11/19.

  • The 14-week stochastic indicator is in extreme overbought range. Our trusty intermediate-term oversold indicator for the S&P 500 (SPX) hit 4 the week of Dec. 21, 2018. It is currently in overbought territory at 97 (Figure 3).

Sources: Bloomberg, Canaccord Genuity. Data as of 4/11/19.

  • Bullish newsletter writer sentiment is reversing extreme pessimism. During the week of Jan. 4, 2019, Investors Intelligence reported only 29.9% of newsletter writers were bullish. Sentiment has since turned more bullish and is currently at 53.9% (Figure 4).

Sources: Bloomberg, Canaccord Genuity. Data as of 4/11/19.

Market outlook summary: Any pause in the upside should prove limited and temporary
In our view, the historic Q4 2018 SPX drop of 20% has created a skeptical environment where investors don’t want to chase the recent strength and instead find excuses to wait for a significant pullback that doesn’t come. Of course, there can be temporary periods of weakness, but the driver of sustainable market activity throughout the current economic cycle is the perception of forward monetary policy and its impact on our core fundamental thesis driven by credit. We would remain focused on what has driven the upside recovery: (1) the impact of the Fed’s dovish pivot, (2) the positive effect of the significant drop in market-based rates, and (3) the stabilization of the very weak global economic data. Our 2019 SPX target remains 2,950.
The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.

Tony Dwyer joined Canaccord Genuity in March 2012 as the firm's U.S. equity market strategist and a senior managing director. In 2015, Mr. Dwyer was named co-director of research, and currently sits on the firm’s operating committee. Prior to joining Canaccord Genuity, he served as equity strategist at Collins Stewart, and also held the additional role of director of research while sitting on the firm's executive committee. Mr. Dwyer started his career at Prudential-Bache Securities in 1987 as an equity market strategist.

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