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Weekly Market Notes
January 21, 2014
Dow 16458 – S&P 500 1838
The equity markets continue to struggle in the early days of 2014. Stocks prices are being held in check by a combination of factors including valuation concerns, excessive investor enthusiasm and a less aggressive Federal Reserve. In addition, fourth quarter earnings have been mixed therefore not providing the necessary spark to trigger a continuation of the December rally. Small cap stocks and NASDAQ issues are leading which is translating into accelerating upside trends in the broad market. There has also been a resurgence in the performance of European equity markets.
The fact that the broad market and foreign markets are in gear suggests that once the extreme optimism is squeezed out the popular averages will be in position to move higher later in the first quarter. Until investor psychology climbs off the current lofty levels now seen in the sentiment indicators stocks will likely be anchored in a trading range. As a result, we believe the near-term risk is to 1810 using the S&P 500 and the reward is to 1850. On periods of weakness investors should focus on the strongest sectors including information technology, health care and the industrials.
The technical condition of the stock market has improved with the sidewise movement in stock prices in January serving to cancel the overbought condition found at the beginning of the month. Investor sentiment, however, has not receded to any measurable extent despite the disappointing performance in the stock market in the first month of the year. Data supplied by the Chicago Board of Options Exchange (CBOE) show the demand for puts has plunged causing the 10-day CBOE put/call ratio to fall into negative territory. The CBOE Volatility Index (VIX) also indicates that investors are too complacent.
Over the course of 2013 a reading below 12 on the VIX caused rallies to stall. Similarly, last week’s rally quit when the VIX fell below 12. The latest data from the National Association of Active Money Manages (NAAIM) also argues the near-term holds limited potential. The most recent NAAIM report shows aggressive money managers nearly fully invested. At the November 2011 lows, this group of money managers was net short the stock market. The NAAIM data is used as a contrary opinion indicator. As the market moves deeper into the second half of the month the ‘January Effect’ will be an increasing concern. The ‘January Effect’ states that as January goes so goes the rest of the year for stocks. Historically, the stock market has risen 62% of the time in January with small cap stocks typically being the leading edge.
The yield on the benchmark 10-year Treasury note continued to slip last week despite signs of better growth for the U.S. economy. The yield on the 10-year T-note fell to 2.83% from 2.86% the previous week. Given our outlook for continuing slow growth for the U.S. economy accompanied with low inflation the yield is expected to move in a tight band of 2.75% to 3.00% into mid-year. The Consumer Price Index (CPI) rose 0.3% in December. Core CPI (less food and energy) increased 0.1%. On a year-over-year basis, consumer prices are up 1.5%. Pricing pressures are coming from the real estate sector (shelter inflation) which accounts for a large share of CPI. Subtracting shelter prices, CPI advanced a modest 1.1%. Inflation is predominately influenced by personal income. Real average earnings fell 0.3% last month with the year-over-year change falling to 0.2%.
In separate reports last week, Industrial Production climbed for the fifth straight month in December. As a result, output was up at a 6.8% annual rate in the fourth quarter of 2013, the most in three years. Capacity Utilization crawled higher to 79.2% from 79.1%. The Capacity Utilization rate remains 1.0% below its long-term average, suggesting the economy can grow significantly from here without greatly impacting inflation. Housing starts fell nearly 10% in December.
November, however, was revised sharply higher. On a 12-month basis, starts are at their best level since the fourth quarter of 2008. Despite improving economic conditions, consumer sentiment remains fragile. The Reuters/University of Michigan Consumer Sentiment Index fell 2.1 points in the mid-January reading. This is reflected in the retail sales data that showed sales rose just 0.2% in December and November was adjusted downward to 0.3% from 0.7%. This week’s economic data including existing home sales and the leading indicators are not anticipated to significantly impact stocks. Home sales are anticipated to be flat and the leading indicators down slightly.
Sector Rankings and Recommendations
No. 1 Information Technology = Strongest sector – Buy. Groups expected to outperform: IT Consulting & Other Services, Data Processing & Outsourced Services, Application Software, Communications Equipment, Computer Storage & Peripherals and Electronic Equipment Manufacturers
No. 2 Industrials = Ongoing strong RS - Buy. Groups expected to outperform: Aerospace & Defense, Building Products, Construction & Farm Machinery Employment Services and Airlines
No. 3 Health Care = Improving RS – Buy. Groups expected to outperform: Health Care Distributors, Health Care Services, Biotechnology and Health Care Facilities
No. 4 Consumer Discretionary = Deteriorating RS – Hold. Groups expected to outperform: Housewares & Specialties, Household Appliances, Hotels Resorts & Cruise Lines and Casinos & Gaming
No. 5 Materials = Improving RS – Hold. Groups expected to outperform: Aluminum, Paper Products, and Construction Materials
No. 6 Financials = Good RS – Buy. Groups expected to outperform: Asset Management & Custody Banks, Diversified Banks, Regional Banks and Other Diversified Financial Services
No.7 Utilities = Weak sector – Hold. Groups expected to outperform: Gas Utilities
No. 8 Consumer Staples = Deteriorating RS – Hold. Groups expected to outperform: Food Distributors and Distillers & Vintners
No. 9 Energy = Weak RS – Hold. Groups expected to outperform: Oil & Gas Storage & Transportation and Oil & Gas Refining & Marketing
No.10 Telecom = Weakest sector – Hold. Groups expected to outperform: Wireless Telecom Services
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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 1200
Two North Tamiami Trail
Sarasota, FL 34236-4702
941-906-2829 Direct Line
888 366-6603 Toll Free
941 366-6193 Fax
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