November 13, 2019

Earnings are up marginally this quarter. Of the 440 companies that have reported so far (88% of the S&P 500), 73% are beating earnings estimates by a median of 5%. On the top line, 55% are beating earnings by an average of 3%. 

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The HCM BuyLine® is firmly positive, but with that said, that does not mean pullbacks are not expected.  Should investors fear or welcome a short-term pullback? Trading indicators are broadly overbought and peaking following the surge in risk assets in Q4. Those with a shorter-term technical view are recommending investors reduce equity exposure. While the risk of a near-term pullback or pause is a legitimate possibility, we would argue cutting equity exposure is short-sighted and a case of missing the bigger market cycle for short-term trading.  

Don’t lose sight of the longer-term bullish market cycle. The key technical point is that equity markets in general, and cyclicals specifically, continue to track the technical profile of a normal bull market cycle. A cycle low was established in December 2018 at the secular uptrend (200-week Simple Moving Average), and monthly momentum indicators continue to build to the upside.

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The Reuters/University of Michigan Consumer Sentiment Index ticked up 0.2 points in the preliminary November survey to 95.7, contrary to the consensus of a same-size decline to 95.3. Consumer expectations rose 1.7 points, its third gain in a row, but current conditions flopped 2.3 points. 

Sentiment peaked in March 2018 but remains elevated and range-bound longer-term, which suggests that consumer spending will continue to support the ongoing economic expansion. Nevertheless, the year over year momentum sentiment has weakened, implying a slower pace of real Gross Domestic Product (GDP) growth ahead. 


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