Weekly Market Notes
November 19, 2012
Dow 12588 - S&P 500 1359
The popular averages fell nearly 2.0% last week and are now down 7.0% or more from the early October peak. The stock market typically rallies following the presidential election, particularly if the incumbent party wins a second term. Important and difficult decisions on fiscal policy are likely responsible for the change in the post election-year pattern in 2012. Until the issues concerning taxes and spending are addressed, the uncertainty is expected to weigh on the stock market.
Significant technical damage has occurred that also requires improvement or repair before a sustainable rally should be anticipated. Of particular concern is the fact that the number of issues making new lows has spiked to 600 (NYSE + NASDAQ), which is more than what was seen at the June lows. In addition, the percentage of S&P 500 industry groups in defined uptrends has caved to just 44% from 53% the previous week (a break below 40% would be considered bearish).
Technical resistance is now the previous support zone of 1375 to 1425. To become more aggressive near-term the downside momentum needs to be broken and investor sentiment more pessimistic. This would be accomplished with a session where upside volume exceeds downside volume by a ratio of more than 10 to 1. Investor pessimism should also move to an extreme as measured by a VIX reading above 22. To become more aggressive intermediate-term look for a return to new highs by the S&P 500 and Dow Industrials with significant improvement in market breadth. It would be a plus if the investor pessimism remained at a relatively high level. The strongest sectors are industrials, consumer discretionary, health care and financials.
Investor sentiment grew more pessimistic last week as evidenced in the extreme readings from the options exchanges. Nevertheless there are some flaws in the indicators as witnessed in the relatively low VIX readings. Given the significant breakdown in the popular averages and the generally bearish global backdrop, investor psychology is not considered excessive or extreme. The sentiment numbers do support the potential for a short-term rally but fall short of signaling a high probability of a sustainable rally.
The economic data continues to support a forecast of slow growth with GDP expected to remain near 2% well into 2013. The numbers released last week were slightly worse than expected. Retail sales were down 0.3% in the month, versus expectations of a 0.2% decline. Initial jobless claims surged to 439,000 last week, well above the expected rise to 375,000. Industrial production posted an unexpected decline of 0.4% in October, with manufacturing production falling 0.9%. Industrial production has declined at a 5.0% annual rate over the past three months, a pace that has historically been associated with recessions. Finally, inflation was in line with expectations, showing the CPI up 0.1% in October.
It is difficult to read too much into these incoming data points, as they are distorted by the fallout from the hurricane that devastated the Eastern U.S. in October. This week brings housing market data (housing starts as well as existing home sales for October), as well as a rare Wednesday release of the initial jobless claims data. The business data this week is not expected to have an important influence on the financial markets. The yield on the benchmark 10-year Treasury note fell under 1.60% last week and is down 30 basis points in less than three weeks. Part of the rally in bond prices is related to a flight to safety but bond prices are also being impacted by slow growth and weak inflation pressures. We continue to anticipate yields will move in range of 1.50% to 1.80% into second quarter of 2013.
Sector Rankings and Recommendations
No. 1 Financials = Strongest sector – Buy. Groups expected to outperform: Thrifts & Mortgage Finance, Asset Management & Custody Banks, Investment Bank & Brokerage; Multi-line Insurance
No. 2 Health Care = Sector-level breadth trends strong – Buy. Groups expected to outperform: Managed Health Care, Biotechnology; Health Care Facilities
No. 3 Consumer Discretionary = Maintaining strong RS –Buy. Groups expected to outperform: Automobile Manufacturers, Casinos & Gaming, Education Services, and Computer & Electronics Retail
No. 4 Industrials = Gaining RS – Buy. Groups expected to outperform: Industrial Conglomerates
No. 5 Consumer Staples = Jump into top 5 in RS – Buy. Groups expected to outperform: Agricultural Products, Personal Products
No. 6 Telecom = RS deteriorating – Hold - Group expected to outperform: Wireless Telecom Services
No. 7 Materials = RS trend weak –Hold. Groups expected to outperform: Paper Packaging; Diversified Metals & Mining and Gold
No. 8 Energy = RS took a hit- Hold. Groups expected to outperform: Oil & Gas Refining & Marketing
No. 9 Utilities = Gaining in RS– Hold. Groups expected to outperform: Gas Utilities
No. 10 Information Technology = Steep drop in RS – Hold. Groups expected to outperform: Home Entertainment Software, Data Processing & Outsourced Services
Market Overview
Short-Term Trading range with risk to 1325 and reward to 1425 on the S&P 500
Long-Term Major support is 1100 on the S&P 500 and the reward is to 1470
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
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