Business and Financial Baird

Weekly Market Notes
February 6, 2012
Dow 12862 - S&P 500 1344

The equity markets, supported by better than expected reports on the U.S. economy, rallied to the best levels since the summer of 2011 last week. In addition, the technical condition of the stock market improved significantly as the broad market moved in harmony with the popular averages.  In a healthy bull market most areas are in gear with the primary trend.  Following last week’s advance, 72% of the industry groups within the S&P 500 are in a bullish uptrend. In addition, 80% of stocks are above their 10-week moving average and 70% above their 30-week moving average. The rally has also expanded globally with more than 95% of international equity markets now trading above their 50- day moving average. Volume has been notably light during the advance, which is causing many technicians to remain skeptical about the sustainability of this year’s advance. Volume has been negatively impacted the past few years by individual investors withdrawing from the market and investment banks cutting back on proprietary trading due to new government regulations. As a result we do not believe the below average volume numbers represent a threat particularly given the fact that upside volume has expanded since early January versus downside volume. In addition to a better economy and a bullish technical backdrop, stocks are benefiting from a bullish monetary environment.  Bernanke, by extending low rates until 2014 and open to another quantitative easing initiative if required, effectively backstops the financial markets, at least over the short and intermediate-term. Stocks enter the new week overbought but given the bullish trend and positive momentum we expect any weakness to be limited in both time and price.  Before stocks encounter significant resistance we anticipate the rally will reach the 1365 level on the S&P 500, which was last year’s high. New buying should be focused on the sectors exhibiting the strongest relative strength including health care, information technology and materials.  

Several measures of investor psychology show increased optimism but short of what would be considered excessive or extreme that often accompanies a market peak. Although there is concern that investor optimism is gaining steam, we do not believe it is broad based or deep seated as to threaten the 2012 rally.

American Association of Individual Investors(AAII): Bulls down to 45% from 47% the previous week; Bears up 25% from 19%; ; We would need to see 3  times as many bulls than bears to turn this indicator negative.

Investors Intelligence (II) tracks recommendations of Wall Street letter writers: Bulls declined to 48.9%,

the fewest since mid-December; Bears rose to 29.8% from 28.7% a week ago; For the II data to issue a sell signal the bulls would need to rise above 55%, or bears plunge below 20%

National Association of Active Investment Managers (NAAIM): Exposure of equities jumped to 68% from 54% last  week; 25% is bullish and 72% bearish

Ten Day CBOE Put/Call Ratio finished the week at 88%; 80% is bearish and 95% bullish.

Three Day CBOE Equity Put/Call Ratio dropped to 58% triggering a short term sell signal; 64% & below is      considered bearish

CBOE Volatility Index (VIX) finished week at 17, suggesting investors are growing complacent.  The VIX dropped

from 30 in December to 17, a level last seen in July 2011 when S&P 500 reached the 1350 mark.

The strong January employment report indicates the U.S. economy is attempting to move out of first gear for the first time in more than 12 months.  Nonfarm payrolls expanded to the best level since the second quarter of 2011, and considerably above consensus expectations.  In addition, the prior two months were revised upward and the unemployment rate fell to 8.3%, the lowest in 36 months.  Despite the strong monthly gain, payroll growth remains below average at this stage of the business cycle suggesting the Federal Reserve will keep QE3 on the front burner. In separate reports, the ISM-Non-Manufacturing Index jumped the most in almost three years last month, indicating growth is accelerating. The ISM Manufacturing Composite Index (PMI) climbed one point, indicating modest acceleration in factory activity in January.  Finally, construction spend spending rose in December for the fifth consecutive month suggesting this component of the economy has turned the corner and is poised for further gains.  Bond yields responded to the positive economic news last week with the 10-year Treasury note climbing more than a point to 1.95%.  Despite the improvement in economic conditions we continue to expect GDP growth in the vicinity of 2.0% in 2012, which along with zero percent fed funds is expected to anchor long-term term Treasury rates near 2.25% into mid-year.

Sector Rankings and Recommendations

No. 1 Health Care = Strong RS – Buy. Groups expected to outperform: Health Care Equipment, Health Care Services, and Biotechnology.

No. 2 Information Technology = RS climbing  – Buy. Groups expected to outperform: Semiconductors, Semiconductor Equipment, and Computer Hardware.

No. 3 Materials = Improving RS trends – Buy. Groups expected to outperform: Diversified Chemicals, Metal & Glass Containers, and Diversified Metals & Mining.

No. 4 Consumer Discretionary = RS trends stay strong – Buy. Groups expected to outperform: Motorcycle Manufacturers, Movies & Entertainment, and Homebuilding.

No.5 Industrials = Improving RS – Buy. Groups expected to outperform:  Building Products, Farm Machinery & Heavy Trucks, and Environmental Services.

No. 6 Financials = RS trends still improving – Hold. Groups expected to outperform: REITs, Diversified Financial Services, and Diversified Banks.

No. 7 Consumer Staples = RS showing some weakness –  Hold Groups expected to outperform: Food Retail, Personal Products, Drug Retail.

No. 8 Utilities = Losing RS – Hold. Groups expected to outperform:  Gas Utilities.

No. 9 Energy = Reduce exposure on rallies - Hold. Groups expected to outperform:  Oil & Gas Storage & Transportation and Integrated Oil & Gas.

No. 10 Telecom Services = Poor RS – Hold. Group expected to outperform:  Integrated.

Market Overview

Short-Term Trading range with risk to 1300 and reward to 1365 on the S&P 500

Long-Term Major support is 1100 on the S&P 500 and the reward is to 1400

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
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