Reuters Insider - Deeper correction possible if companies cut earnings estimates, warns Randy Watts
10/10/2018 09:29
Click the following link to watch video: https://share.insider.thomsonreuters.com/link?entryId=0_1ypwvy4i&referenceId=0_1ypwvy4i&pageId=ReutersNews Source: Reuters Insider Description: William O'Neil & Co.'s chief investment officer tells Reuters' Fred Katayama the U.S. equities uptrend is under pressure. Keep a close eye on earnings guidance and the 200-day moving average on the S&P 500 and Nasdaq, he says. Short Link: https://reut.rs/2CzpIaw Video Transcript: Tech stocks rebounding Tuesday afternoon, lifting the NASDAQ for the first time in four days. However, it's a mixed market. We've got the Dow for the third time in four days. Let's find out what all this means and take a little technical look at it. We're joined by Randy Watts. He is Chief Investment Officer at William O'Neil & Company. Welcome back, Randy. You're here because I know you know all the technicals. Looking at the technicals, the S&P 500 trading just above its 50-day moving average, but the NASDAQ's still trading below its 100-day moving average. What do you make of the market pattern of the trading that we've been seeing of late and including today? br/ br/ Sure. So we think the market's at a very important time technically. We'd really like to see the S&P hold that 50-day moving average. With regards to the NASDAQ, we'd like to see a trade above its 100. We're looking at first support from here around 7,600 for the NASDAQ, and after that the 200-day. The NASDAQ's about 3% away from its 200-days and the S&P is about 4% away from its 200-day moving average. Obviously, if either of those indices were to violate their 200-day moving averages, that would make us much more cautious. br/ br/ As of right now, do you see the uptrend that we saw as recent as a little over a week ago, is that uptrend under pressure? br/ br/ We think it's under pressure in the sense that the market hasn't been following its normal seasonal pattern. We think the market is still okay for now. We think—like we said, we want to see it have—hold those support levels. We would also like to see maybe a weekly reversal on the upside on volume to make us a little bit more bullish. We would also like to see some of the growth groups that have been doing well the last couple of years do well again right here. We think a lot of the direction of the market is going to be taken by earnings season, which is really going to start at the end of this week. br/ br/ And what do we need to see in earnings season in order to convince you, "Hey, we're okay"? What are the risks you see and what do you need to see? br/ br/ I think we need to see two things. First, the estimates for the S&P 500 overall is for 6% revenue growth and 16% earnings growth. I think we need to see companies at least match that. Second, we want to see estimates for the rest of the year and for next year at least stay stable. We think if estimates start to fall here, then that would be negative for the marketing. It could portend sort of a deeper correction. br/ br/ We saw the market leaders – technology – lagging especially the big names. Is that a reason to hold off on reinvesting in stocks, or is it time to pick up some of those names? br/ br/ We would like to see some more positive action before we put more capital in. Again, we'd like to see some positive reversal and we'd like to see some the growth rates start to act a little bit better. We try to take our direction from the market as opposed to predict it, so we want to start to see positive action before we put new capital in. br/ br/ We've seen some weakness in, for example, emerging markets. Last time you were on our show in September, you said hey stay away from them for now. br/ br/ Yes. br/ br/ Russell 2000 has been pretty weak in retreating. TIme to nibble at any of those— br/ br/ We think they're select small-cap stocks that are interesting. We are disappointed by the action in small cap. It's a little unusual because normally small-cap stocks do well when the Dollar rises and also do well in a strong economy, which we have right now. br/ br/ And any small-cap stocks that you like in particular? br/ br/ Yeah. We really still like Pure Storage. This is a company that does flash servers for the data center. Flash is becoming much more important in the data center because of new technologies like AI and they're the leader in this transition. They have a pure play product line, and we think that's a very interesting stock. br/ br/ To stay away from emerging markets still? br/ br/ We still think emerging markets are very risky. We think two things. First, there's $2.7 trillion of emerging market debt in both government and corporate that has to be repaid through 2025. That's Dollar-denominated. So as the Dollar goes up, it becomes harder to pay that back. Second, we want to see both the indices and the emerging market currencies start to do better before you re-enter. We'd rather miss the first 5% or 10% and make sure we're in uptrend than try to rush in right now when really those markets and economies have not stabilized yet. br/ br/ Okay. So to put all of what you'd said today in a nutshell, the key to watch – earnings, special guidance, and the 200-day moving average on the S&P and Nasdaq br/ br/ Correct. br/ br/ Okay. Thanks a lot, Randy, appreciate your thoughts. Our thanks to Randy Watts of William O'Neil & Company, and for that technical lesson as well. I'm Fred Katayama. This is Reuters