Baird

SARASOTA – As much the markets would like, Greece could not manage keep itself out of the headlines last week. The agreed upon bailout package was cast into doubt as the Greek Prime Minister proposed holding a referendum on the proposed austerity measures and bailout package. The dawning of a new week brings further uncertainty in this ongoing drama (including the prospective formation of a new governing coalition), although the real tragedy is that the Greek situation is obscuring larger issues that are now surfacing, including a deteriorating situation in Italy that presents a much more significant problem for the EU than does Greece. Bond yields and CDS spreads in Italy moved higher, and Berlusconi has rejected efforts from the IMF to offer its support. Last week’s G-20 meeting in France concluded without meaningful resolutions aimed at the ongoing European crisis or the slowdown in global growth. A new era has been ushered in at the ECB, as the leadership handoff from Trichet to Draghi was followed by a 25 basis point rate cut. By the end of the week, this move seemed less aimed at the financial crisis on the continent and more specifically in response to slowing growth and an easing in inflation pressures. The Federal Reserve did not offer new discrete plans for further accommodation, although the dissension on the FOMC moved from three wanting less accommodation to one wanting more accommodation. With central bankers getting more dovish and the incoming data showing lackluster growth, further rounds of quantitative easing are likely in the works. 

Investor sentiment continues to turn more optimistic, unwinding the excessive pessimism that fueled the October rally but not moving to excessive bullishness. The AAII survey of individual investors showed bulls slipping slightly from 43% to 40%, while bears rose from 25% to 30%, but this still marked the third week in a row that bulls outnumbered bears. The Investors Intelligence survey showed that among advisory services bulls rose for the third week in a row and are now at 43%, while bears dropped to 37% last week, from 38% the previous week and 46% three weeks ago. Active money managers are moving back into the market, with the NAAIM number rising from 38% to 45% - in early October this was -4%. Options data showed more skepticism – the put/call ratios moved generally higher last week and the VIX climbed back above 30 as volatility has remained elevated amidst macro uncertainties. Elevated volatility has been accompanied by heightened correlations among stocks. There are many ways to measure this – one is that in 12 of the last 15 trading days, 85% or more of the stocks in the S&P 500 have moved in the same direction. Overall sentiment has become less supportive of further gains (while the momentum from the October rally has also faded) but is not yet becoming a headwind. Industry group breadth trends climbed slightly last week, but remain shy of issuing a bullish signal.  

The U.S. employment report for October showed an increase of 80,000 jobs, plus revisions added 50,000 more in each of the previous two months. The unemployment rate fell from 9.1% to 9.0%, with the broader U-6 measure of unemployment fell from 16.5% to16.2%. While generally inline to better-than-expected, the employment report hardly reflects a robust labor market. The yearly change in both payrolls and the hours worked index are rolling over and the yearly growth in wages (1.8%) is still at the bottom of its range. Also reported last week, the German unemployment rate rose for the first time since February 2010. The Canadian unemployment rate was also higher, and payrolls fell 54,000 in October, versus expectations of a 20,000 job gain. This was the largest decline since February 2009. Domestic purchasing managers indexes (PMI) were generally weaker than expected, although still above 50 (indicating growth). The manufacturing PMI came in at 50.9, with the non-manufacturing PMI dropping to 52.9. European PMI’s were also weaker in October, but there they dropped to recessionary levels. The German manufacturing PMI showed the first contraction in activity since Sep 2009, and the EU services PMI dropped to 46.4 from 48.8. This week, data flow from the U.S. and Europe slows, but production and retail sales data from China (due Tuesday) could attract attention. Slow growth in the U.S. and increased likelihood of recession in the EU make the degree of slowing in the emerging markets more important. Domestic data this week is predominantly soft data – optimism surveys on Tuesday and consumer sentiment on Friday. Initial jobless claims data on Thursday are still important. 

Sector Rankings and Recommendations

No. 1 Information Technology = Strong RS and seasonal tailwind – Buy. Groups expected to outperform: Application Software, Communications Equipment, Computer Storage & Peripherals, and Semiconductor Equipment

No. 2 Utilities = Strong RS – Buy. Groups expected to outperform:  Gas Utilities and Electric Producers

No. 3 Consumer Discretionary = RS moderating, particularly in near term – Hold. Groups expected to outperform: Consumer Electronics, Housewares & Specialties, Tires & Rubber, and Advertising.

No. 4 Energy = RS holding steady - Buy. Groups expected to outperform:  Oil & Gas Refining and Marketing, Oil & Gas Storage & Transportation and Integrated Oil & Gas.

No. 5 Industrials = Improving RS, near-term leader – Hold. Groups expected to outperform:  Electrical Components & Equipment, Commercial Printing, and Employment Services.  

No. 6 Health Care = RS trends deteriorating – Hold. Groups expected to outperform: Pharmaceuticals, Health Care Distributors, and Biotechnology

No. 7 Consumer Staples = RS trends rolling over – Hold. Groups expected to outperform: Hypermarkets & Super Centers, Distillers & Vintners, and Agricultural Products

No. 8 Financials = RS pop short-lived – Hold. Groups expected to outperform: Consumer Finance and Insurance Brokers.

No. 9 Telecom Services = RS laggard – Hold. Group expected to outperform:  Wireless.

No. 10 Materials = Short-term RS improving – Hold. Groups expected to outperform: Gold Mining and Specialty Chemicals

Market Overview

Stocks

Short-Term Trading range with risk to 1225 and reward to 1260 on the S&P 500

Intermediate-Term Trading range with risk to 1150 and reward to 1285 on the S&P 500

Long-Term Major support is 1050 on the S&P 500 and the reward is to 1365

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.

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