Business and Financial Baird

Weekly Market Notes
February 13, 2012
Dow 12801 - S&P 500 1343

Stocks stumbled into the week-end with the Greek debt situation moving back into the headlines and amid renewed concerns about the health of the Chinese economy. Stocks posted their largest loss of the year on Friday, although the S&P 500 still managed to hold above support near 1335 and rallied into the close. This may well mark the beginning of a consolidation phase, but given the strength in the broad market and lack of excessive optimism, near-term weakness in the popular averages is likely to be limited.  Of minor concern is the cooling in momentum that is being seen across the indexes, which coupled with widespread overbought conditions, could prompt a stalling in the near-term uptrend. The S&P 500 still appears poised to test its early-2011 peak (near 1365) before the current cyclical move is complete. While the S&P 500 and Dow Industrials posted weekly declines, trends at the industry group level continued to improve. We now have more than three-quarters (76%) of the industry groups in up-trends, which argues against significant near-term weakness in the indexes. After a strong start to 2012, stocks could be poised to consolidate their recent gains before moving back into rally mode later in the first quarter. February has a history of being a month of consolidation, so a move sideways at this point would fit with that pattern.

Optimism continues to build in the system although it remains shy of excessive and is not a headwind for stocks. Both the Investors Intelligence and AAII surveys last week showed bulls moving to 52%. The divergence is among bears. The Investors Intelligence data shows 29% bears, while the AAII survey has them at 20%. We likely need to see bulls above 55% and bears in the teens to signal excessive optimism in these surveys. The NAAIM survey of active money managers showed stock market exposure increasing again (five weeks in a row, and nine of the last ten), moving up to 73%. This is now moving into a bearish zone. The key with these weekly surveys will be the reaction that comes if stocks do enter a consolidation phase. A continued build in optimism even with stocks pulling back would be viewed as a negative, while a quick return to the bearishness that was prevalent two months ago could supportive of stocks. In this regard options activity last week, and Friday in particular, was encouraging. The VIX Fear index, which approached 16 early in the week, closed above 20 for the first time since mid-January. The 10-day CBOE put/call ratio dropped from 89% to 86% (below 80% would be bearish), while the 3-day CBOE equity put/call ratio rose from 58% to 62% (below 65%, it remains short-term bearish). Increased demand for puts on Friday suggests that complacency is not yet deep-seated enough to be a significant headwind for stocks. 

Domestic economic data last week was relatively sparse, allowing Greek austerity plans and data out of China to grab the headlines. Chinese data showed higher than expected readings on inflation, and lower than expected growth, creating some uncertainty whether a soft-landing has been successfully executed. Domestically, data showed consumer credit expanding at an elevated rate for the second month in a row, which is a positive for the near-term outlook, but suggests that balance sheet re-trenchment among households has been delayed. The labor market continued to improve, with initial jobless claims dropping from 373,000 to 358,000. The data flow intensifies this week, with data in inflation, sales and production for January all being reported. Both the PPI and CPI reports are expected to show modest increases in inflation in the month. Retail sales for January are expected to have risen 0.7% overall and 0.5% when auto sales are excluded. While the economy undoubtedly strengthened in the final quarter of 2011 (data revisions could push growth in the fourth quarter above 3.0%), the persistence of that strength over the course of 2012 remains in doubt. The bond market remains skeptical, as the yield on the benchmark 10-year T-Note remains below 2.0%. A year ago it was at 3.6%. 

Sector Rankings and Recommendations

No. 1 Information Technology = Sharp rise in RS over last month – Buy. Groups expected to outperform: Electronic Manufacturing Services, Semiconductor Equipment, and Computer Hardware.

No. 2 Consumer Discretionary = RS trends stay strong – Buy. Groups expected to outperform: Automobile Manufacturers, Consumer Electronics, Household Appliances.

No. 3 Health Care = RS slipping but still strong – Buy. Groups expected to outperform: Health Care Equipment, Health Care Facilities, and Biotechnology.

No. 4 Financials = Strong RS trends; nearing upgrade – Hold. Groups expected to outperform: Investment Banking & Brokerage, Diversified Financial Services, and Diversified Banks.

No.5 Industrials = RS rolling over – Buy. Groups expected to outperform:  Building Products, Construction & Engineering, Industrial Machinery.

No. 6 Materials = RS slips but trends still favorable – Buy. Groups expected to outperform: Construction Materials and Diversified Metals & Mining.

No. 7 Consumer Staples = RS trends deteriorating – Hold. Groups expected to outperform: Food Retail and Agricultural Products.

No. 8 Energy = Reduce exposure on rallies - Hold. Groups expected to outperform:  Oil & Gas Storage & Transportation and Oil & Gas Refining & Marketing.

No. 9 Utilities = Poor RS trends – Hold. Groups expected to outperform:  Gas Utilities.

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

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
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