Business and Financial Baird

Weekly Market Notes
April 23, 2012
Dow 13029 - S&P 500 1378

The equity markets managed to carve out a small profit last week despite ongoing problems in Europe and a sharp decline in market leader Apple. The stock market was supported by a string of first quarter earnings reports that offered few surprises which was a victory given profit expectations are low. The market remains anchored, however, by deteriorating economic fundamentals and a weakened technical condition. Soft jobs numbers and a deteriorating situation in Europe have raised the level of uncertainty over corporate profits. 

Although the weakness in the popular averages has been easily contained the broad market has deteriorated significantly.   The percentage of industry groups within the S&P 500 that are in a definable uptrend fell to 66% last week from 68% the previous week and 81% three weeks ago. As a result it will be important that the next rally be broad based with the percentage of S&P industry groups moving back above 80%. This would argue that most areas are in harmony with the primary trend, which is indicative of a healthy bull market. Over the near-term stocks are anticipated to remain in a consolidation/correction phase due to the likelihood first quarter earnings will remain mixed.

Looking further out the market is expected to find support from continued low interest rates and expectations that the Fed will keep the safety net (QE3) in place for the remainder of the year.  The rally is expected to resume following a test of the lows (1357 on the S&P 500) later in the second quarter.  Once the consolidation/correction phase runs its course we anticipate the best performing groups will be found in the consumer staples, health care and consumer discretionary sectors.

The rally in the equity markets last week failed to impress investors as most measures of market psychology still show a healthy level of caution and skepticism. The sentiment data last week indicated that although much of the optimism seen in the early months of 2012 has been corrected, outright pessimism often seen before a rally has not yet entered the picture.  The second quarter correction will most likely end with a test of the lows (1355 on the S&P 500) accompanied by a hint of fear entering the market as measured by the VIX moving into the 21 to 25 zone.

• Ten Day Put/Call Ratio was unchanged last week at 96%/ 80% is bearish and 95% bullish. Three Day CBOE Equity Put/Call Ratio was unchanged at 63%.  This indicator is considered neutral- 60% is bearish and 71% bullish.  CBOE Volatility Index (VIX) finished the week at 17.4, down from 19.5 the previous week - 16 is considered bearish and 22 bullish.  A move above 22 would suggest investors are growing fearful. 

• American Association of Individual Investors (AAII): Most recent report showed the bullish camp rising to 31% from 28% the previous week.   The outright bears fell to 34% from 41%.  The bears would need to outnumber the bulls by a ratio of 2 to 1 to trigger a buy signal from this valuable indicator.

• Investors Intelligence (II) tracks the recommendations of Wall Street letter writers.  The bulls last week dropped to 44.1% from 48.4% the previous week and 52.1% two weeks ago.  The outright bears among the advisors climbed to 23.7% from 21.5% the previous two weeks.  To trigger a buy signal we would likely need to see the bulls fall below 40% and the bears rise to 30%.
• National Association of Active Investment Managers (NAAIM): Exposure to equities by aggressive money managers fell for the second week in a row to 47% from 53% last week and 72% two weeks ago.  The NAAIM data is considered neutral (25% is bullish and 74% bearish).
• NDR Crowd Sentiment Poll offered a neutral reading last week.

Over the past six weeks the economic data has been softer than anticipated. Since the beginning of March, more than 60% of the data releases have disappointed. The Economic Surprise Index for the U.S. has moved to its lowest level since early October. Last Monday, retail sales for March came in above expectations (+0.8%, vs. +0.3%) but that is where the good news for the economy stopped. The March housing data was weaker than expected, with housing starts and existing home sales posting unexpected declines. Industrial production in March was flat, versus an expected increase of 0.3%. Early reports for April were not encouraging, as both the Empire Manufacturing and Philly Fed Indexes posted larger than expected declines (although both indicated a continued expansion in activity). Initial jobless claims were higher than expected (during the survey week for the monthly employment report), and the four-week average has moved to its highest level since January.  This week’s highlights include Wednesday’s FOMC decision and Friday’s release of the first look at Q1 GDP data. No change in policy is expected to emerge from the FOMC meeting, but the degree to which the weaker than expected U.S. economic data and renewed financial strains in Europe are incorporated into the commentary will be closely watched for hints of QE3. The Q1 GDP report is expected to show that real growth slowed last quarter to 2.5%, from the 3.0% annual rate seen in the fourth quarter of last year. Core inflation likely accelerated from 1.3% to 2.1%.The yield on the 10-year T-Note finished the week below 2.0%, as disappointing economic data and fading confidence in the euro-area sparked demand for Treasuries.

Sector Rankings and Recommendations

No. 1 Consumer Discretionary = Strongest sector – Buy. Groups expected to outperform: motorcycle manufacturers, movies & entertainment, restaurants, manufacturing apparel and accessories

No. 2 Information Technology = Good RS sector – Buy. Groups expected to outperform: application software, semiconductor equipment, systems software and data processing services

No. 3 Financials = RS improving – Buy on weakness. Groups expected to outperform: REITs, diversified financial services and diversified banks and insurance

No. 4 Consumer Staples = Good RS – Buy. Groups expected to outperform: food retail, personal products, drug retail, soft drinks

No. 5 Health Care = Improving RS – Buy. Groups expected to outperform: health care managed, health care services, and biotechnology

No. 6 Utilities = Improving RS – Hold. Groups expected to outperform:  electric distributors and electric integrated

No. 7 Industrials = Falling RS – Hold. Groups expected to outperform:  building products, environmental services, and industrial machinery

No. 8 Telecom Services = Wait for RS improvement – Hold. Group expected to outperform:  telecom services

No. 9 Materials = Poor RS – Hold. Groups expected to outperform: diversified chemicals, metal & glass containers, diversified metals & mining and gold mining

No.10 Energy = Weakest sector - Hold. Groups expected to outperform:  oil & gas storage & transportation, integrated oil & gas, refining & marketing

Market Overview

• Short-Term Trading range with risk to 1340 and reward to 1410 on the S&P 500

• Long-Term Major support is 1100 on the S&P 500 and the reward is to 1500

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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