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Weekly Market Notes
April 28, 2014
Dow 16361– S&P 500 1863
The equity markets finished last week with minimum damage to the popular averages despite a harsh selloff on Friday. Early in the week stocks rode a strong rally to the top of the recent trading at 1880 on the S&P 500 Index. That zone on the S&P has cause stocks to pause on more than one occasion and remains a formidable obstacle to overcome. First quarter earnings have been far better than expected but this has failed to offer the market much support.
Although expectations were unusually low, first quarter earnings overall were very good considering the economy barely grew in the first three months of the year. The problem is that for many of the high growth issues and former market leaders, estimates for strong earnings gains were already built into prices at the close of the fourth quarter last year. The harsh sell down suffered by the former leading groups in recent weeks has failed to disturb the rest of the list.
Despite the weakness in former leaders including biotechnology, and high tech areas such as cloud computing and 3-D printing, the popular averages remain close to where they began the year. Although the recent volatility in the stock market is likely to continue, the downside is expected to be limited given the current low interest rate environment. It is likely, therefore, that this year’s broad trading range will continue with support near 1800 and resistance at 1900 on the S&P 500.
Stocks enter this week in an oversold condition and with investor expectations low. This combination has been favorable for stocks and has helped sponsor many of the short-term rallies the market has enjoyed the past two years. This suggests another attempt will be made to overcome the upside resistance, which for the Dow Industrials is near 16600.
The Federal Reserve’s Open Market Committee meets this week. It is widely anticipated that Fed Chair Yellen will continue withdrawing from quantitative easing by reducing bond purchases by another $10 billion. Any policy statement that could follow the Fed meeting on Wednesday is likely to include reassurances that rates will be kept low for a considerable period of time. The sectors that are currently outperforming, including the industrials and materials are expected to continue.
The U.S. economy, with the exception of housing, is showing significant improvement. The Leading Economic Index (LEI) jumped the most in four months last month. On a year-over-year basis, LEI is up 6.1%, the most since July 2011 according to Ned Davis Research. The latest LEI numbers indicate the economy is gathering strong upward momentum. In separate reports, durable goods orders rose 2.6% in March, the most in four months. On a year-over-year basis, durable goods orders have increased 4.5%. Improving business conditions are apparently influencing consumer sentiment. The Bloomberg Consumer Comfort Index climbed last week to the best level in eight months. The housing sector of the economy remains problematic. The Reuters/University of Michigan Consumer Sentiment Index rose 1.5 points in April to 84.1, the best level in eight months.
The housing market continues to weaken. New home sales plunged more than 14% in March. New home sales have declined in four of the past five months to a 384.000 unit annual rate, the lowest since July 2013. In addition, last month’s decline was the second biggest since May 2010. On a year-over-year basis, sales are down 13.3%. New home sales have a seasonal tailwind during the Spring season. It will be important that sales improve given that new home sales have widespread implications for the overall economy. Existing home sales, which represent 85% of all home sales, fell in March. Existing home sales have declined seven of the past eight months. Initial claims for unemployment insurance rose 24,000 last week, the most since December. The four-week moving average moved up by 4750 to 316,750 claims.
Economic reports of significance this week include the April Employment Report due Friday. Consensus estimates are that the economy created 210,000 new jobs last month and that the unemployment rate fell to 6.6% from 6.7%. The Institute of Supply Management (ISM) Manufacturing Index due Thursday is anticipated to show a modest improvement. GDP estimates due Tuesday are expected to show the economy grew just 1.1% in the first quarter. The yield on the benchmark 10-year Treasury note fell to 2.66% last week from 2.73%. We anticipate that for the yield on the 10-year Treasury to move above the 3.0% threshold would require two or three months of 250,000+ new jobs. Absent of significant job growth we anticipate that the bond yields will remain grounded near current levels.
Sector Rankings and Recommendations
No. 1 Energy = Strongest RS – Buy. Groups expected to outperform: Oil & Gas Equipment & Services, Oil & Gas Exploration & Production and Integrated Oil & Gas
No. 2 Industrials = Snap-back in RS - Buy. Groups expected to outperform: Construction & Farm Machinery, Office Services & Supplies and Railroads
No. 3 Utilities = Continues to outperform – Buy. Groups expected to outperform: Electric Utilities, Multi-Utilities & Unregulated Power, and Independent Power Producers
No. 4 Information Technology = Decline in RS – Hold. Groups expected to outperform: Electronic Equipment Manufacturers, Systems Software, Semiconductor Equipment and Electronic Manufacturing Services
No. 5 Materials = Good RS – Buy. Groups expected to outperform: Diversified Chemicals, Aluminum, Gold, Steel, Fertilizers & Agricultural Chemicals and Construction Materials
No. 6 Health Care = Falling RS – Hold. Groups expected to outperform: Health Care Equipment, Health Care Services, and Managed Health Care
No. 7 Consumer Staples = Improving RS – Buy. Groups expected to outperform: Packaged Foods & Meats, Drug Retail, Brewers, Tobacco, Household Products and Distillers & Vintners
No. 8 Financials = Declining RS – Hold. Groups expected to outperform: Thrifts & Mortgage Finance, REITs, Property & Casualty Insurance and Regional Banks
No. 9 Telecom = Improving RS – Hold. Groups expected to outperform: Integrated Telecom Services
No. 10 Consumer Discretionary = Weakest sector – Hold. Groups expected to outperform: Department Stores, Home Furnishing Retail and Household Appliances
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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
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Sarasota, FL 34236-4702
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