Baird Market and Investment Strategy
Weekly Market Notes
October 13, 2014
Dow Industrials 16544
S&P 500 1906
Please refer to Appendix – Important Disclosures
Five Characteristics Found at a Market Bottom
Summary
The equity markets declined more than 3.0% last week. Seasonal pressures are
playing a pivotal role, but the financial markets are also plagued by deteriorating
economic fundamentals and a weakening technical condition. Despite the fact
that the U.S. economy is performing relatively well, corporate earnings are under
pressure in key sectors, including information technology. The tech sector is
where some investors typically engage in the use of margin debt as an
investment strategy. Considering margin debt is at an all-term record high, margin
liquidation likely played a significant role in last week’s decline. Despite the steep
October drop, the S&P 500 Index remains positive for the year and the Dow
Industrials are down only a fraction year to date. The broad market, however, is
experiencing significant weakness, which is a concern for the entire list. The
broad market typically leads the averages by six or more months. The narrow
advance this year is shown by the fact that only 50% of the S&P 500 industry
groups are in uptrends. In 2013, more than 90% of the S&P groups were in
uptrends. Before we can comfortably argue that the stock market is on firm
ground there should be considerable improvement in the performance by the
broad market.
Economy: CEO confidence drops to lowest
level of the year. Consumer confidence
snaps back due to more job openings and
lower gasoline prices.
Fed Policy: Fed meets October 28. Low
inflation and weak global conditions argue
Fed will remain friendly.
Sentiment: Put buying remains heavy.
Aggressive fund managers only 34%
invested in stocks.
Strongest Sectors: Health and consumer
staples, utilities and financials.
What to look for technically that would suggest that the stock market has made an investable low:
1. A contraction in the number of issues hitting new 52-week lows
2. Excessive investor pessimism including more than 2x as many bears than bulls in the AAII survey, more than 25% bears in the
Investors Intelligence study and 30% equity exposure or less found in the survey of Active Money Mangers
3. At least one session where upside volume exceeds downside volume by a ratio of 10-to-1 or more
4. The CBOE Volatility Index rises to the vicinity of 22 to 27
5. The CBOE equity put/call ratio climbs to 100%
Investors should wait for at least three of the above indicators to turn positive before assuming the decline has run its course.
Sentiment
Current
Previous
Indication
CBOE 10-Day Put/Call Ratio
Below 80% is bearish; Above 95% is bullish
104%
105%
Bullish
CBOE 3-Day Equity Put/Call Ratio
Below 53% is bearish; Above 64% is bullish
76%
65%
Bullish
VIX Volatility Index
Below 16 is bearish; Above 21 is bullish
21.2
14.6
Bullish
American Association of Individual Investors
Twice as many bulls as bears is bearish; more bears than
bulls is bullish
Bulls:
Bears:
39.9%
31.0%
Bulls:
Bears:
35.4%
30.9%
Neutral
Investors Intelligence (Advisory Services)
55% bulls and/or less than 18% bears is considered bearish
Bulls:
Bears:
45.5%
14.1 %
Bulls:
Bears:
48.05%
15.3%
Bearish
National Assoc. of Active Investment Mgrs. (NAAIM)
Below 30% is bullish; Above 70% is bearish
Ned Davis Research Crowd Sentiment Poll
Bruce Bittles
Chief Investment Strategist
Ned Davis Research Daily Trading Sentiment Composite
[email protected]
941-906-2830
34%
42%
Neutral
Optimism Fading
Extreme Optimism
Neutral
Extreme Pessimism
Extreme Pessimism
Bullish
Weekly Market Notes
RS Ranking
RS
Current
Previous Trend
Sub‐Industry Detail
Leaders:
Health Care
1
**
1
Consumer Staples
2
**
2
+
Utilities
3
**
3
+
Information Technology
4
**
4
‐
Financials
5
**
5
Telecom Services
HC Equipment; HC Distributors; HC Facilities; Managed Health Care; Biotechnology; Pharmaceuticals
6
Laggards:
Leaders:
Laggards:
Leaders:
Laggards:
Leaders:
Laggards:
Leaders:
7
8
Materials
8
7
Industrials
9
9
Energy
10
10
Interent Software & Services; Systems Software
Electronic Equipment & Instruments
Multi‐Sector Holdings; Specialized Finance; Investment Banking & Brokerage
Laggards:
Leaders:
Laggards:
Leaders:
6
Consumer Discretionary
Brewers; Soft Drinks
Personal Products
Housewares & Specialties; Footwear; Education Services; Home Improvement Retail
Auto Parts & Equipment; Tires & Rubber; Automobile Manufacturers; Motorcycle Manufacturers; Leisure Products; Casinos & Gaming; Broadcasting; Publishing
Laggards:
Leaders:
Laggards:
Leaders:
‐
Diversified Metals & Mining; Gold; Steel
Diversified Support Services; HR & Employment Services; Railroads
Construction & Engineering; Electrical Components & Equipment; Construction Machinery & Heavy Trucks
Laggards:
Leaders:
Laggards:
Oil & Gas Drilling; Integrated Oil & Gas; Oil & Gas Exploration & Production; Coal & Consumable Fuels
** Denotes Current Relative Strength‐Based Overweight Sectors **1 = strongest sector – 10 = weakest sector
Daily Data 7/05/2006 - 10/09/2014 (Log Scale)
Standard and Poor's 500 Stock Index
1954
1846
1743
1647
1556
1469
1388
1311
1239
1170
1105
1044
986
931
880
831
785
742
700
Standard
NAAIM
is
14%
Below
14%
M
J
Index
Gain/
Annum
73%
* Between
and 73%
%
of Time
0. 2
32. 2
5. 3
62. 7
40. 0
5. 1
Source: S&P Dow Jones Indices
D
M
J
2007
(DAVIS134)
Survey
Above
S
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
-5
and Poor's 500 Stock
Gain/Annum When:
1954
1846
1743
1647
1556
1469
1388
1311
1239
1170
1105
1044
986
931
880
831
785
742
700
S
D
M
2008
J
S
D
M
2009
J
S
D
M
J
S
D
2010
M
J
S
2011
D
2012
S
D
M
J
S
2013
D
M
J
High Average Allocation (%)
Optimistic
NAAIM member
firms who are active money managers
are asked each week to provide a number which represents
their overall equity exposure at the market close on a
specific day of the week, currently Wednesdays.
(Weekly Data Updated Twice a Month)
Low Average Allocation (%) Pessimistic
S
2014
Source: NAAIM, Survey of Manager Sentiment http://www.naaim.org
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
-5
National Association of Active Investment Managers (NAAIM) Survey Average
 Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
See NDR Disclaimer at
www.ndr.com/copyright.html
. For data vendor disclaimers refer to
www.ndr.com/vendorinfo/
.
Source Ned Davis Research
Robert W. Baird & Co.
Page 2 of 3
Weekly Market Notes
Appendix – Important Disclosures and Analyst Certification
This is not a complete analysis of every material fact regarding any company, industry or security. The opinions
expressed here reflect our judgment at this date and are subject to change. The information has been obtained
from sources we consider to be reliable, but we cannot guarantee the accuracy.
ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST
The indices used in this report to measure and report performance of various sectors of the market are
unmanaged and direct investment in indices is not available.
Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the
United States Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and
those laws and regulations may differ from Australian laws. This report has been prepared in accordance with
the laws and regulations governing United States broker-dealers and not Australian laws.
Copyright 2014 Robert W. Baird & Co. Incorporated
Other Disclosures
UK disclosure requirements for the purpose of distributing this research into the UK and other countries
for which Robert W Baird Limited holds an ISD passport.
This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the
Financial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment
professionals and may not be distributed to private clients. Issued in the United Kingdom by Robert W. Baird
Limited, which has an office at Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB, and is a company
authorized and regulated by the Financial Conduct Authority. For the purposes of the Financial Conduct Authority
requirements, this investment research report is classified as objective.
Robert W Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license.
RWBL is regulated by the Financial Conduct Authority ("FCA") under UK laws and those laws may differ from
Australian laws. This document has been prepared in accordance with FCA requirements and not Australian
laws.
.
Robert W. Baird & Co.
Page 3 of 3