Weekly Market Notes
May 12, 2014
Dow 16583– S&P 500 1878
The equity market’s attempt to break out from a tight three month trading range was turned back again last week. The Dow Jones Industrials traded at an all-time record high on Friday but small-cap indices and the NASDAQ suffered losses of 1% to 2% for the week. The fact that stocks are struggling despite a friendly backdrop of declining interest rates and improving economic conditions has frustrated investors who pulled $4 billion out of stock funds the week ending April 30.
The glaring divergence of big over small stocks is likely a reflection of excessive valuations given to the Russell 2000 versus the large-cap indices at the start of the year. Although the broad-based S&P 1500 is just 1.5% below its high, the average stock is down 12% from its 52-week high. Ten percent of the companies within the S&P 1500 are trading more than 30% below their 52-week highs. Entering the new week, the stock market is expected to benefit from the oversold condition in the NASDAQ and Russell 2000. This could provide another opportunity for the market to overcome the 1880 to 1900 area on the S&P 500. To expect something more, the broad market would be required to slip back in gear with the large cap averages.
The technical indicators for the stock market are offering conflicting messages. The trend of the Dow Industrials and S&P 500 Index remains positive but stocks have lost momentum and the persistent low volume has helped abort all rallies this year. Despite the move to new highs by the blue-chip indices, the percentage of S&P 500 industry groups in defined uptrends fell to 72% last week. Short-term sentiment indicators, including data provided by the Chicago Board of Options Exchange, support the prospects of a near-term rally.
The demand for put options has increased in recent weeks from often wrong options traders. The data from Investors Intelligence, which tracks the mood of Wall Street letter writers, showed a rise in bulls last week and a decline in the bearish camp. This was offset, however, by the report from the American Association of Individual Investors (AAII) Survey that showed more bears than bulls. Investors should focus on the strongest sectors including energy, materials, industrials and utilities.
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The recent flow of economic data points to slightly improved growth in the second and third quarters. Initial claims for unemployment insurance declined 26,000 to 319,000. The four-week average of claims rose to 324,000, up 4,500 from the previous print. Nevertheless, the longer-term trends in unemployment remain down suggesting the jobs market will continue to improve into the summer months. The stronger labor market is having a positive influence on consumers.
Bloomberg’s Consumer Comfort Index fell slightly last week. It was the first decline in four weeks. The Index is near the best reading since 2008. In addition, the Wells Fargo/Gallup Small Business Index is now at the highest level in six years. Automobile sales have been the bright spot in the economy the past two years. The trend is likely to continue as used car prices are firming and at the best level in two years. On a year-over-year basis, prices are up 4.8%, the most since July 2011. This suggests that the auto sector will continue to have a bullish influence on the overall economy.
Although the outlook for the U.S. economy has strengthened, some headwinds to growth remain. The weakness in the world economy remains problematic. The global manufacturing PMI has now declined for its second straight month and emerging markets continue to be a drag as Brazil, Russia, China and South Africa economies are contracting. U.S. productivity plunged in the first quarter falling at a 1.7% annual rate. Although the slowdown was weather related, productivity on a year-over-year basis is below the average pace at this stage of the economic expansion. As a result, U.S. unit labor costs rose at a 4.2% annual rate. Inflation prospects continue to remain low but should wages begin to rise we would anticipate that pricing pressures would closely follow. The forecast for GDP has been that growth would be in the vicinity of 2.00% to 2.50%. Given that first quarter GDP revisions will likely show the economy contracted in the first three months, the growth rate for the U.S. economy in 2014 is likely to be reported near the low end of our forecast.
This week’s economic reports include April retail sales that are anticipated to be down from the robust numbers seen in March. The Producer Price Index (PPI), due Wednesday, is expected to show wholesale prices increased 0.2% last month. The Consumer Price Index (CPI), due Thursday are likely to show prices rose at a 0.3% clip in April. April housing starts, to be reported Friday, are expected to show an annual rate toward the 1,000,000 mark from 946,000 last month. The May Michigan Sentiment number is anticipated to show a small uptick to 84.5.
Sector Rankings and Recommendations
No. 1 Energy = Strong RS – Buy. Groups expected to outperform: Oil & Gas Equipment & Services, Oil & Gas Exploration & Production and Integrated Oil & Gas
No. 2 Materials = Good RS – Buy. Groups expected to outperform: Diversified Chemicals, Aluminum, Gold, Steel, Fertilizers & Agricultural Chemicals and Construction Materials
No. 3 Industrials = Improving RS - Buy. Groups expected to outperform: Construction & Farm Machinery, Office Services & Supplies and Railroads
No. 4 Utilities = Downtick in RS – Buy. Groups expected to outperform: Electric Utilities, Multi-Utilities & Unregulated Power, and Independent Power Producers
No. 5 Information Technology = Decline in RS – Hold. Groups expected to outperform: Electronic Equipment Manufacturers, Systems Software, Semiconductor Equipment and Electronic Manufacturing Services
No. 6 Consumer Staples = Improving RS – Buy. Groups expected to outperform: Packaged Foods & Meats, Drug Retail, Brewers, Tobacco, Household Products and Distillers & Vintners
No. 7 Health Care = Deteriorating RS – Hold. Groups expected to outperform: Health Care Equipment, Health Care Services, and Managed Health Care
No. 8 Telecom = Decline in RS – Hold. Groups expected to outperform: Integrated Telecom Services
No. 9 Financials = Poor RS – Hold. Groups expected to outperform: Thrifts & Mortgage Finance, REITs, Property & Casualty Insurance and Regional Banks
No. 10 Consumer Discretionary = Weakest sector – Hold. Groups expected to outperform: Department Stores, Home Furnishing Retail and Household Appliances
Got Questions? Ask Guido
Article provided by Robert W. Baird & Co. with the authorization of its author for Evan Guido, Vice President, Financial Advisor at the Sarasota office of Robert W. Baird & Co., member SIPC. The opinions expressed are subject to change, are not a complete analysis of every material fact and the information is not guaranteed to be accurate.
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Evan R. Guido
Vice President of Private Wealth Management
One Sarasota Tower, Suite 1200
Two North Tamiami Trail
Sarasota, FL 34236-4702
941-906-2829 Direct Line
888 366-6603 Toll Free
941 366-6193 Fax
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