Weekly Market Notes
March 5, 2012
Dow 12977 - S&P 500 1369
The equity markets were mixed last week with the S&P 500 Index showing a modest gain. The results for small-cap indices were noticeably different with the S&P Small Cap Index and Russell 2000 declining nearly 3% for the week. Weakening trends in the small cap averages adds to a growing list of technical divergences that have recently surfaced. The Dow Transports and Dow Utilities failed to match the new recovery highs by the Dow Industrials. In addition, the past two weeks has seen a declining number of stocks hitting new 52-week highs and an uptick in the new low list. Last week also witnessed the first downtick in the percentage of S&P industry groups in uptrends since the beginning of 2012. The mounting number of divergences argues the market could enter a consolidation or correction phase.
Looking further out we continue to expect stocks to reach new highs before the cycle runs its course. Longer-term trend and momentum indicators remain bullish for equities. Seasonally March is a good month for stocks historically up 60% of the time. Monetary conditions remain friendly for equities. Fed Chairman Bernanke’s remarks last week did not include the prospects for another round of quantitative easing but should the economy weaken we believe QE3 would be quickly ushered in. The bottom line is that any pull back or weakness in the stock market is likely to be limited and followed by a retest of the highs later this month. New funds should be directed to the strongest sectors including information technology, consumer discretionary and industrials.
Investor psychology turned slightly less optimistic last week. The sentiment indicators suggest that investors are up-beat on the equity markets but a distance from what would be considered excessively optimistic. Considering that important peaks in stock prices almost always occur with optimism at an extreme, the current rally should have more room on the upside.
American Association of Individual Investors (AAII): Bulls rose slightly to 45% from 44% the previous week; Bears in the AAII survey fell to 27% from 28%; we would need to see three times as many bulls than bears to turn this indicator negative
Investors Intelligence (II) tracks the recommendations of Wall Street letter writers: Bulls 51.1%, unchanged last week and down from 54.8% two weeks ago. The majority of market tops have occurred with 55% to 60% bulls. The outright bears declined to 25.5% from 26.6%; in order to trigger a sell signal the bulls would need to rise above 55% and/or the bears fall to 20%
National Association of Active Investment Managers (NAAIM): Exposure to equities climbed to 74% last week and remains on a sell signal; 25% is bullish and 72% is bearish
Ten Day CBOE Put/Call Ratio finished the week at 92%, down from 96% the previous week; 80% is bearish and 95% bullish; High level of interest in put options last week argues that investor optimism is quick to turn negative
Three Day CBOE Equity Put/Call Ratio jumped to 67% and is considered neutral.
CBOE Volatility Index (VIX) ended the week ended unchanged from the previous week at 17.3 (16 is considered bearish and 25 bullish). It should be noted that the VIX has a better record of signaling bottoms in the stock market than market tops because tops take much longer to form than stock market bottoms.
The economic data was mixed last week but the bias remains to the upside for the U.S. economy. The strongest area in retail sector is the automobile market. Indications are that vehicle sales rose 6% last month. Auto sales have been higher in five of the past six months, and currently running at a 15 million annual rate, the best in four years. Preliminary reports of chain-store activity shows sales jumped more than 6% in February, well above consensus estimates of 4.5%. The February ISM Manufacturing Index, fell to 52.4 from 54.1 the previous month suggesting this sector of the economy is losing momentum (below 50 argues the manufacturing sector is contracting). The weakness in last month’s ISM data suggests that the recession in Europe could be impacting U.S. business. Most notable in the ISM data was the new orders component which dropped to 54.9 from 57.6.
Housing also remains problematic despite the jump in the affordability. The latest Case-Shiller data released last week showed home prices falling for the eighth straight month in December. This week brings a host of economic reports including the February Employment Report. Consensus estimates are that the economy created 210,000 jobs last month with the unemployment rate unchanged at 8.3%. Although the jobs market has shown significant improvement in 2012 the weather could be influencing the data and could be taking jobs away from subsequent months. The yield on the benchmark 10-year Treasury note was unchanged last week remaining just under 2.00%. We anticipate that Treasury yields will remain in the range of 1.75% to 2.25% over the next two quarters of 2012.
Sector Rankings and Recommendations
No. 1 Information Technology = Strongest sector – Buy. Groups expected to outperform: semiconductors, semiconductor equipment, systems software, data processing services, computer hardware and computer storage & peripherals
No. 2 Consumer Discretionary = RS trends strong – Buy. Groups expected to outperform: motorcycle manufacturers, movies & entertainment, restaurants, manufacturing apparel and accessories
No. 3 Industrials = Improving RS – Buy. Groups expected to outperform: building products, environmental services, and industrial machinery
No. 4 Financials = RS trends improving – Hold. Groups expected to outperform: REITs, diversified financial services, and diversified banks
No. 5 Consumer Staples = RS showing weakness – Hold. Groups expected to outperform: food retail, personal products, drug retail, soft drinks
No. 6 Energy = RS remains problematic - Hold. Groups expected to outperform: oil & gas storage & transportation, integrated oil & gas, refining & marketing
No. 7 Health Care = Good RS – Buy. Groups expected to outperform: health care managed, health care services, and biotechnology
No. 8 Materials = Improving RS trends – Buy. Groups expected to outperform: diversified chemicals, metal & glass containers, diversified metals & mining and gold mining
No. 9 Utilities = Losing RS – Hold. Groups expected to outperform: electric distributors and electric integrated
No. 10 Telecom Services = Poor RS – Hold. Group expected to outperform: telecom services
Market Overview
Short-Term Trading range with risk to 1330 and reward to 1385 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.
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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
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