Ripe or Rotten Stocks?

A mixed crop.

In a week when many Asian markets were closed for the new Year of the Pig, President Trump made his State of the Union address and the Bank of England held rates you would have thought a light week. And yet a hint from the Reserve Bank of Australia about lowering rates and the slashing of Eurozone growth forecasts from the European Commission, cast a dark shadow on the global economy and, until recently strong stock markets. The fact Indices did an inverted-V week could be seen as prophetic as it typifies our Index outlook for 2019 we published this week.

 

This week we take a step down from the macro into the micro world of companies as we present our 2019 outlook for Stocks, further evidence of what we believe will be a volatile and exciting year for indices and indeed the Forex market.

After publishing over 40 pages of research on stock markets in last week’s INDEX 2019 readers may perhaps think we have covered everything possible. STOCKS 2019 could just focus on the 2019 outlook of our five regularly covered stocks, but we wanted to take a deeper dive into corporate earnings and particularly look at sectors and individual stocks important to the market. The stock indices are obviously a very broad reflection of all kinds of companies, and individual stocks can make very different moves and even move sequentially.  Opportunities will arise in different stocks and sectors at different times as the first half of 2019 looks to continue the recovery. Later in the year, some stocks will turn lower earlier than others and give us clues as others join them in a synchronized crash much like we saw in late 2018.

 

Last year we identified NFLX as the first stock to top and turn lower and this helped guide the turns in other stocks, sometimes many months later. The lead has continued and may help us throughout the year.

In fact, NFLX has now done a Mandelbrot and repeated its initial decline and recovery so we not only have a lead for stocks such as AMZN, but we have a lead for Netflix from itself in a prior period.

This kind of repeating price action could be made possible by a realization of the fundamental concerns we saw in the latter half of 2018. There is a very real threat of slowing global growth and stalling corporate earnings, but the reaction to this threat was somewhat overdone by some of the stock falls in 2018. AAPL, for instance, was down 40% in less than 3 months, a fall that allowed them to announce poor earnings in January and still bounce.

 

The Fed’s dovish stance will also help stocks recover, but as we will illustrate in the fundamental section, EPS could struggle to grow at expected levels. Margin expansion—the main driver of EPS growth—could now stall, and slowing global growth should mean slowing revenue growth. So while stock prices can recover, important underlying fundamentals could start to reflect the fears driving the late 2018 sell off. As we will illustrate, a rapid increase in EPS growth (driven this time by tax reform) and subsequent slowing is a feature of major tops such as 2000, 2007 and 2015.

Technically, there is a lot of variance in stock movements and we have found it helpful to group stocks according to structure. This gives us a simple way to manage expectations. Some important stocks like AAPL have very clear trend sequences lower and this tells us several things. Firstly, the top is in and any bounce will fade at a lower high. Secondly, there will be a proportional decline again at some stage.

In our section on sentiment we will look at why “FOMO” (Fear Of Missing Out) has turned into just “F” (Fear). Actually a simple chart of one of the market leaders does a pretty good job at explaining why.

We will also look at how another acronym, “TINA” (There Is No Alternative) has also changed, although TIAA (There Is An Alternative) probably won’t catch on.

Cash is back, and as we will see, this has two important implications for the market and stock/sector performance.

 

The fact the holders of that cash have become more distrustful but flexible suggests plenty of opportunity which we will see and  exploit—with evidence.

Here’s to making the very best.

 

Good Luck and Good Trading

 

 

Ed Matts, Founder
Andrew McElroy, Chief Stocks Analyst
Matrix Trade

 

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