The equity markets completed the first week of the third quarter with mixed results as the pre-fourth rally gave way to post holiday weakness. The market was negatively impacted by a series of economic reports showing the recovery losing momentum. The focus of attention will now be on the Federal Reserve Board. Bernanke will go to work cognizant of the surprisingly weak response by foreign equity markets last week to the latest moves by the central bankers to lower interest rates in Europe and China. The next scheduled Fed meeting is August 1. With monetary policy on hold until then, the focus for the next few weeks will be on second quarter earnings that are likely to be mixed at best. Fortunately expectations for the next round of earnings data are low suggesting that much of this could be already discounted by the markets.
The technical condition of the stock market has improved over the past few weeks but remains at a distance from offering investors a fat pitch. The percentage of industry groups within the S&P 500 that are in defined uptrends climbed to 62% last week from 59% the previous week. This number would need to improve to 65% or better to signal that the rally that developed late in the second quarter is back on track. The loudest argument for a continuation of a trading range environment is the fact that the leadership remains with defensive areas. Sectors hitting new 52-week highs last week included utilities, consumer staples, telecom and health care. Prior to the market breaking out on the upside we would expect aggressive areas such as energy, industrials and materials to gain relative strength at the expense of defensive stocks that typically trail in a sustained rally. The bottom line is that the stock market’s technical condition is not convincingly strong enough to overcome the deteriorating economic fundamentals. As a result we anticipate a continuation of the trading range environment for stocks as we move deeper into the third quarter.
The weight of the sentiment indicators is now neutral. Indicators of investor psychology are moving away from pessimism with some signs that optimism is creeping into the market. The drop in the CBOE Volatility Index (VIX) last week signals that the problems found in the global economy are not having a significant impact on the mood of investors.
á Ten Day Put/Call Ratio fell to 98% last week from 101% the previous week - 80% is bearish and95% bullish. Three Day CBOE Equity Put/Call Ratio was unchanged at 69 – 58% is considered bearish and 72% bullish. CBOE Volatility Index (VIX) fell sharply last week to 17 from 18 the previous week - below 16 is considered bearish with a reading above 23 bullish.
á American Association of Individual Investors (AAII): The latest report shows a rise in the bullish camp to 33% from 29% the previous week. The outright bears plunged to 33% from 44%. For the first time in two months the AAII survey shows an equal number of bulls and bears. The AAII data would need to show twice as many bulls than bears to trigger a sell signal from this valuable indicator.
á Investors Intelligence (II) tracks the recommendations of Wall Street letter writers. The bullish camp jumped to 42.5% last week from 38.7% the previous week. The bears fell slightly to 24.5% from 24.7%. The advisory service data would need to show at least 50% bulls before this indicator would signal trouble ahead.
á The advisory service data indicates unusual complacency given the unstable news and economic backdrop.
á National Association of Active Investment Managers (NAAIM):Exposure to equities by aggressive money managers jumped to 63% last week from 45% the previous week. The NAAIM data is considered neutral (15% is bullish and 75% bearish).
á Ned Davis Research Crowd Sentiment indicators moved to levels considered neutral.
The latest ISM reports show the U.S. economy is struggling to regain traction. The manufacturing survey was reported at 49.7 for June (less than 50 is a level economists associate with economic contraction). The ISM June non-manufacturing dropped to 52.1 from 53.7 the previous month and less than the 53 level most were expecting. In terms of the global economy, 79% of the world is exhibiting a contraction in industrial activity. The response by the central banks that had the appearance of a coordinated effort was a 25 basis point drop in rates by the ECB to a record low .75%. The Bank of England initiated another round of quantitative easing to battle the recession underway in that country. The Bank of China lowered rates last week for the second time in the second quarter, as China’s growth rate has stalled near the 7% level. The Bank of Demark cut rates to negative 0.2%. The world now looks to the Federal Reserve to lower rates in the face of worsening business conditions including the June Employment Report. Non-farm payrolls were reported below expectations for the fourth month in a row. Job growth for the second quarter averaged 75,000 per month, down from 225,000 in the first quarter. The latest employment report echoes statements from the vast majority of business reports that argue the U.S. economy is losing steam fast. We anticipate that the GDP grew at an annual rate of 1.5% in the second quarter, down from 1.9% in the first quarter. For all of 2012 we now expect GDP growth to be in the vicinity of 1.75% to 2.00%. As a result the yield on the benchmark 10-year Treasury note fell to 1.54% last week. For the remainder of 2012 the yield on the 10-year T-note is expected to remain in a range of 1.50% to 2.00%.
Sector Rankings and Recommendations
No. 1 Telecom = Strong RS – Overbought Hold - Group expected to outperform: telecom services
No. 2 Health Care = Improving RS – Buy. Groups expected to outperform: biotechnology, pharmaceuticals, health care supplies and health care distributors and services
No. 3 Information Technology = Earnings comparisons could be worrisome – Hold. Groups expected to outperform: application software, systems software, data processing services and computer hardware
No. 4 Consumer Staples = Strong RS – Buy. Groups expected to outperform: food retail, personal products, and drug retail, soft drinks, tobacco, and food distributors
No. 5 Utilities = New 52-week high – Hold. Groups expected to outperform: electric distributors and electric integrated
No. 6 Consumer Discretionary = Downtick in RS – Hold. Groups expected to outperform: home building, home improvement, automotive, movies & entertainment, restaurants, general merchandise and home furnishing
No. 7 Materials = improving RS – Buy. Groups expected to outperform: diversified chemicals, specialty chemicals, containers & packaging
No. 8 Industrials = Wait for RS improvement – Hold. Groups expected to outperform: building products, industrial machinery, construction & engineering, diversified commercial services and transportation-railroads
No. 9 Financials = Deteriorating RS – Hold. Groups expected to outperform: REITs residential, diversified financial services and diversified banks and insurance
No.10 Energy = Weakest sector for 2012 - Hold. Groups expected to outperform: oil & gas equipment services
Market Overview
Short-Term Trading range with risk to 1310 and reward to 1375 on the S&P 500
Long-Term Major support is 1100 on the S&P 500 and the reward is to 1450
 |
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
Comments
No comments on this item
Only paid subscribers can comment
Please log in to comment by clicking here.