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Weekly Market Notes
February 18, 2014
Dow 16154 – S&P 500 1838
The equity markets rallied sharply last week with the popular averages gaining more than two percent. Stocks were supported by comments from Fed Chair Janet Yellen that interest rates would stay low for a considerable period of time. Yellen added that although the Fed’s taper program would continue as scheduled it would be slowed should economic data show the recovery stalling. This is important given the recent economic data has caused economists to reduce first quarter GDP growth estimates from 3.5% to 1.5%.
The assurance by the new Fed Chair of continuity in Fed policy assisted the equity market in recording its best weekly gain in 2014. The February rally has carried the S&P 500 Index within striking distance of the all-time record high at 1848. The potential for the market going forward will greatly depend on continued improvement in market breadth and investor sentiment remaining skeptical and not complacent. The rally broadened out last week with the NYSE advance/decline line and the S&P 500 mid-cap advance/decline lines hitting a new record high. The percentage of S&P 500 industry groups in uptrends, however, experienced only a small improvement to 68% from 67% last week and 90% at the start of the year. Support is 1770 using the S&P 500 and resistance is 16588 using the Dow Industrials.
The technical condition of the stock market improved during the late stages of the January/February decline. The most important changes can be found in the overbought/oversold statistics and the data on investor sentiment. Despite the sharp recovery in the popular averages the past two weeks the market is no longer overbought and the extreme optimism found at the start of the year has vanished. The weight of the sentiment indicators is now neutral. It will be important going forward that investor psychology avoid becoming too complacent once the weather clears and the economic data improves.
We would become concerned should the 10-day CBOE put/call ratio fall below 80%, the CBOE Volatility Index drop below 12, the American Association of Individual Investor survey show twice as many bulls than bears, and the Investors Intelligence numbers show more than 55% bulls. Small caps are lagging the market, which if it continues could lead to the development of negative divergences. It will also be important that the Russell 2000 Index move back in gear with the S&P 500. This would be accomplished if the Russell 2000 Index hit a new high (above 1182) along with the S&P 500.
The unusually harsh winter weather is preventing economists from developing any firm conclusions as to the state of the U.S economy based on the recent flow of economic data. Judging by the reaction of the equity markets to the weak numbers on the economy the data is considered by many to be irrelevant. The true state of the U.S. economy will not likely be known until March or April. Last week’s data on industrial production, retail sales and housing showed business conditions deteriorating. This resulted in reduced expectations for first quarter GDP growth, which was downgraded to 1.5% from previous estimates of 3.5% growth. In addition, fourth quarter factory output was revised down implying that fourth quarter GDP will also be revised lower. The good news is that import prices rose a meager 0.1% last month. On a year-over-year basis, import prices are down 1.5%. Declining import prices makes it more difficult for domestic producers to increase prices. The yield on the benchmark 10-year Treasury note rose slightly last week but is expected to be range bound (2.50% to 3.00%) into the second quarter.
The unreliability of the recent economic data places additional stress on the Federal Reserve in gaining important insight on the future performance of the economy. Nevertheless, the Fed is expected to reduce the level of quantitative easing by $10 billion at the next Fed meeting in March. Yellen has indicated that the labor markets are not as strong as the unemployment data suggests. This is interpreted to mean that inflation expectations will be the Fed’s primary resource in determining the next move on monetary policy. This week’s economic data includes the Consumer Price Index (CPI) Report due on Wednesday. Consensus estimates are that the CPI for January rose 0.1%; less food and energy 0.2%. Next month’s inflation numbers will be more closely monitored given the recent rise in oil above $100, natural gas above $5 and gold rising above $1300 last week.
Sector Rankings and Recommendations
No. 1 Health Care = Strongest sector – Buy. Groups expected to outperform: Health Care Distributors, Health Care Services, Biotechnology and Health Care Facilities
No. 2 Information Technology = Gaining in RS – Buy. Groups expected to outperform: IT Consulting & Other Services, Data Processing & Outsourced Services, Application Software, Communications Equipment, Computer Storage & Peripherals, Electronic Equipment Manufacturers and Home Entertainment Software
No. 3 Utilities = Big jump in RS – Buy on weakness. Groups expected to outperform: Gas Utilities, Electric Utilities
No. 4 Materials = Improving RS – Buy. Groups expected to outperform: Diversified Chemicals, Aluminum, Paper Products, and Construction Materials
No. 5 Industrials = Deteriorating RS – Hold. Groups expected to outperform: Aerospace & Defense, Building Products, Construction & Farm Machinery, Employment Services, Railroads and Airlines
No. 6 Consumer Discretionary = Deteriorating RS – Hold. Groups expected to outperform: Homebuilding, Specialized Consumer Services, Automotive Retail, Hotels Resorts & Cruise Lines and Casinos & Gaming
No. 7 Financials = Falling RS – Hold. Groups expected to outperform: Diversified Banks, Regional Banks, Thrifts & Mortgage Finance and REITs
No. 8 Consumer Staples = Deteriorating RS – Hold. Groups expected to outperform: Drug Retail 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
Got Questions? Ask Guido
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
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