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The equity markets struggled last week finishing the five-day stretch little changed. Stocks continue to face a number of hurdles entering the new week. Technically, the market is overbought and overbelieved. The latest economic data suggests the economy is slowing from last year’s quickened pace.

This has added to the uncertainty surrounding Fed policy in 2015. Consensus estimates now identify September as the most likely time frame for when Janet Yellen will pull the trigger on short-term interest rates. The most recent inflation reports, both at home and abroad, indicate that the deflationary forces remain worrisome.

The strong U.S. dollar, in addition to keeping inflation low, has caused the export sector to weaken. Fourth quarter GDP was revised down, primarily due to weak sales abroad. The uncertainty surrounding the Fed, mixed data on the economy and excessive optimism on the part of investors suggest stocks will continue to consolidate the strong February gains.

Our largest concern is that liquidity in the stock market has been drawn down and needs to be replenished before stocks can move significantly higher. There is an inverse relationship between liquidity and sentiment. When investors become excessively optimistic it generally means that a large portion of their investable funds are already committed to equities.

This can be seen in the latest data from the National Association of Active Investment Managers (NAAIM) that shows the fifth-highest allocation to stocks in the history of the survey. Last week’s NAAIM report showed that money manager’s commitment to stocks at 99%.

Additional evidence of reduced liquidity is found in the most recent survey from the American Association of Individual Investors (AAII). The AAII data shows a 68% commitment toward stocks by the average investor. At the March 2009 bottom the AAII data showed only 41% allocated to stocks. At the 2007 peak, the AAII numbers
showed a 70% allocation to equities.

The latest report from Investors Intelligence, which tracks the opinion of Wall Street letter writers, shows an unusually large percentage of advisory services bullish. Near-term support using the S&P 500 Index is near 2060.

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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

Senior Vice President of Private Wealth Management

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