SARASOTA –The equity markets fell for the third time in a row last week. Although the decline from the April peak has been limited to less than three percent, the market has suffered a significant loss of momentum. European banking issues related to the Greek debt problem were a contributing factor to last week’s performance. The required austerity measures to help reduce the debt burdens of many developed nations including the U.S. have created an environment of uncertainty over global economic growth prospects. Over the very near-term the equity markets are expected to struggle but we anticipate several counter-trend rallies off and on into the summer months. Longer-term the risks continue to build as the government stimulus programs reverse into austerity headwinds and the Fed’s second quantitative easing program, meant to provide liquidity to the stock market, expires. New buying should be done on periods of weakness. Support is near 1300 on the S&P 500 with resistance 1365. The strongest sectors are defensive areas including health care, consumer staples and utilities all of which hit new highs last week. The weakest sectors are financials and technology.
Investor psychology turned more guarded last week. The demand for put options (a bet on a down market) exploded suggesting short-term traders were excessively bearish. The CBOE 10-day put/call ratio finished the period at 94% versus 91% the previous week (75% is considered bearish and 95% bullish). The three day CBOE equity put/call ratio remained on a short-term buy signal expanding to 72% from 69% the previous week (52% is considered bearish and 63% bullish). The latest survey from the American Association of Individual Investors (AAII) showed more bears (41%) than bulls (27%). This valuable indicator would trigger a buy signal when the bears outnumber the bulls by a ratio of two to one or more. The most recent report from Investors Intelligence, which tracks the opinion of Wall Street letter writers, shows a drop in bulls to 45.6% from 51.1% the previous week. The outright bears among the advisors rose to 19.6% from 18.5%. The fact that there are more than twice as many bulls than bears among the advisors is considered bearish. The latest data from the National Association of Active Investment Managers (NAAIM) shows a drop in exposure to equities to 72% from 82% two weeks ago (74% is considered bearish and below 40% bullish). The sentiment indicators point to increasing skepticism which should help cushion the immediate downside.
Evidence continues to mount that the U.S. economic recovery is losing momentum. Reports from regional Fed districts indicate that business is slowing throughout most of the country. The Empire State General Business Conditions Index showed its first decline in six months. The report also showed prices paid by the manufacturing sector are rising faster than selling prices, which means corporate profits could be under pressure in the second half of the year. In separate reports, Industrial Production was flat last month. The report was saved from red ink due to a rise in utilities and mining output that offset manufacturing output, which was down for the first time since the first quarter of 2010 and the most since May of 2009. Most important is the fact that a very weak housing market is weighing heavily on the economy. Housing starts fell in April, building permits dropped for the third time in four months and existing home sales moved down from an already low level. As a result median existing home prices are off 5.0% from a year ago. Finally the Leading Economic Index (LEI) fell in April for the first time since June of 2010 signally a likely slowdown in economic activity into the third quarter. Bond yields are reflecting the economic weakness as the yield on the benchmark 10-year Treasury plunged to 3.10% mid-week, down from 3.74% in February. The recent break in commodity prices suggests that inflation pressures are on hold, which is expected to keep bond yields in the vicinity of 3.00% to 3.75% into the fourth quarter.
Sector Rankings and Recommendations
No. 1 Health Care = Increasing RS – Marketweight/buy. Groups expected to outperform: Health Care Equipment & Services, Health Care-Managed and Health Care Facilities
No. 2 Consumer Discretionary = Strong RS – Marketweight/buy. Groups expected to outperform: Auto Parts & Equipment, Leisure, Broadcasting & Cable and Manufacturing Home Furnishing
No. 3 Consumer Staples = Increasing RS – Marketweight/buy. Groups expected to outperform: Packaged Foods & Meats, Personal Products, Soft Drinks and Food distributors
No. 4 Industrials = Positive RS – Marketweight/buy. Groups expected to outperform: Railroads, Construction & Farm Equipment, Aerospace & Defense, Industrial Machinery, Railroads, Air Freights & Couriers and Electrical Components
No. 5 Telecom Services = Good RS – Marketweight/hold. Group expected to outperform: Wireless
No. 6 Energy = Falling RS – Marketweight/hold. Groups expected to outperform: Oil & Gas Storage & Transportation, Oil & Gas Equipment & Services, Coal & Consumable fuels and Oil and Gas Refining and Marketing
No. 7 Utilities = Uptick in RS - Marketweight/buy. Groups expected to outperform: Gas Utilities, Electric Producers
No. 8 Materials = Drop in RS – Marketweight/hold- Groups expected to outperform: Diversified Metals & Mining, Diversified Chemicals, Gold Producers and Containers & Packaging
No. 9 Information Technology = Weak RS - Marketweight/hold. Groups expected to outperform: Software & Services, IT Consulting & Services, Electronic Equipment & Instruments, Office Electronics and Application Software
No. 10 Financials = Rock bottom of RS rankings. Marketweight/hold.
Market Overview
Stocks
Short-Term Trading range with risk to 1300 and reward to 1365 on the S&P 500
Intermediate-Term Trading range with risk to 1250 and reward to 1390 the S&P 500
Long-Term Major support at 1100 on the S&P 500 – Reward to 1400 on the S&P 500
Overweight Sectors Industrials & Consumer Discretionary
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 806
Two North Tamiami Trail
Sarasota, FL 34236-4702
941-906-2829 Direct Line
888 366-6603 Toll Free
941 366-6193 Fax
www.EVANGUIDO.com
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