Weekly Market Notes
March 25, 2013
Dow 14512 – S&P 500 1556
The equity markets quickly ignored the latest flare-up in the Euro zone finishing the week virtually unchanged. Entering the new week, stocks remain focused on the outcome in Cyprus, which has yet to be resolved. The futures on the S&P 500 traded higher Sunday night, indicating the market is expecting a positive resolution. Looking beyond the latest Eurozone crisis, the markets will soon be focusing on second quarter earnings and perhaps more importantly on guidance for the remainder of 2013 from CEOs. Considering that earnings expectations have been ratcheting down the past six months, second quarter results are not expected to be a threat to the market.
The technical condition of the market has quietly deteriorated in recent weeks. Most notable is the loss of upside momentum as measured by the shrinking percentage of stocks trading above their 50-day moving averages since the peak in January. In addition, the short-term momentum has diverged from the trend in stock prices, which is often a leading indicator of a possible cooling off period. The stock market also remains overextended as the brief pull back in stock prices in February was too shallow to relieve the overbought condition. This is currently being felt in the market’s stiffening resistance as the averages approach new highs. The combination of low volume, low volatility and high investor confidence is a formula that could make further near-term gains difficult.
Looking past any near-term weakness that might develop, stocks continue to be supported by favorable momentary policy. Another important factor is market breadth, which remains positive with most areas in gear with the popular averages. This suggests that once the excessive optimism is squeezed out of the market and the overbought condition is relieved stocks are likely to follow an upward path into the heat of the summer. Unlike the period in the late 1990’s and 2006 when investor optimism was deeply seated, we believe the bullish sentiment in the present example is only skin deep and likely to shift quickly should the market correct. As result any weakness that does develop is expected to be limited to the 1485 to 1500 using the S&P 500.
At the close of the Federal Reserve Open Policy Committee meeting last week it was announced that the current quantitative easing programs will remain in force into year end and more likely into 2014. The only surprise in the Fed’s policy statement was an apparent downgrade in the Fed’s GDP forecast for 2013 and 2014. In addition, Bernanke does not expect the unemployment rate to improve significantly over the next 24 months. This argues that the Fed’s easy money policy will last through 2015. Bernanke has targeted the labor markets as the potential trigger for a shift in monetary policy.
The Fed is using a 6.5% unemployment rate as redline indicator that the economy has gained sufficient velocity to begin taking their foot off the accelerator. Recent economic reports indicate the U.S. economy continues to show progress, although the gains this year are likely to be limited. The Philly Fed Current Activity Index, which many economists feel is a good indicator for the country, rebounded in March. This suggests that a moderate expansion of manufacturing is underway. The Conference Board’s Leading Economic Index (LEI) rose in February. It was the fifth increase in the past six months indicating the expansion in economic activity should continue.
Last week’s reports on housing, consumer sentiment and retail sales offered the message of continued moderate growth. Housing starts climbed 0.8% in February, in line with consensus estimates. Single-family starts rose to a 618,000 annual rate, the best since the summer of 2008. Building permits, which are a leading indicator for future starts, jumped 4.6%, the best reading since June of 2008. On a year-over-year basis, permits have increased 33%. The latest housing data, however, must be taken with a measure of caution given that Sandy rebuilding efforts could be distorting the data to the upside.
Virtually all the gains in starts occurred in the north east with the rest of the country losing ground last month. This is perhaps reflected in the fact that mortgage applications have dropped in four of the past five weeks. In separate reports, the strength in March retail sales was due to spending on household staples including gasoline. Discretionary spending remains fragile as witnessed in the slowdown in restaurant revenue. In addition, two thirds of the gain last month were prompted by inflation with net volume gains showing virtually no progress. Looking further out, consumer sentiment plunged in March. The University of Michigan Consumer Sentiment Index fell to 71.8 last month from 77.6 in February. This is the lowest reading since December 2011 suggesting high taxes and weak wage gains remain problematic for many consumers.
Sector Rankings and Recommendations
No. 1 Health Care = Strongest sector – Buy. Groups expected to outperform: Biotechnology, Health Care Facilities and Pharmaceuticals
No.2 Consumer Staples = Jump in RS – Buy. Groups expected to outperform: Food Retail, Brewers, Soft Drinks and Packaged Food & Meats and Drugs Retail
No. 3 Consumer Discretionary = Maintaining good RS – Buy. Groups expected to outperform: Broadcast and Cable TV, Computer & Electronics Retail and Advertising
No. 4 Financials = Remains in top RS – Buy. Groups expected to outperform: Asset Management & Custody Banks and Property & Casualty Insurance
No. 5 Telecom = Jump into top five – Buy. Groups expected to outperform: Integrated Telecom Services
No. 6 Utilities = Improving RS – Hold. Groups expected to outperform: Independent Power Producers, Multi-Utilities & Unregulated Power
No. 7 Industrials = Loss in RS – Hold. Groups expected to outperform: Airlines, Office Services and Supplies and Building Products
No. 8 Energy = Decline in RS – Hold. Groups expected to outperform: Oil & Gas Refining & Marketing, Oil and Gas Storage & Transport and Oil & Gas Exploration & Production
No. 9 Materials = Weak RS – Hold. Groups expected to outperform: Specialty Chemicals, Paper Products and Paper Packaging
No. 10 Information Technology = Weakest sector – Hold. Groups expected to outperform: Internet Software & Services and Electronic Equipment Manufacturers and Home Equipment Software
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
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