Baird Market and Investment Strategy
Weekly Market Notes
October 20, 2014
Dow Industrials 16380 S&P 500 1887
Please refer to Appendix – Important Disclosures
Initial Move Off Of Lows Must Prove Itself
Summary
The S&P 500 lost 1% last week, but the reversal off of the mid-week lows has
raised the hope that a durable bottom is in place. While the improved
performance of small-caps and increased evidence of excessive pessimism
support this view, there is little evidence from the breadth and momentum
indicators that this move is more than an oversold bounce. In other words, while
an encouraging first step, more evidence is needed before suggesting that risks
have diminished and the path of least resistance is higher.
Economy: Small business optimism
dropped and retail sales were disappointing
but jobless claims moved to a 14-year low.
Fed Policy: Fed meets October 28. Low
inflation and weak global conditions argue
Fed will remain friendly.
The mid-week low on the S&P 500 was accompanied by a spike in the VIX above
30 (the highest level since 2011), continued high put/call ratios, and a collapse in
treasury yields (the 10-year T-Note yield briefly moved below 2.0%). Data from
the NAAIM later in the week showed active money managers becoming
significantly more bearish, with the exposure index dropping below 10%. Advisory
services and individual investors remain curiously optimistic. A quick return to
optimism could cap the potential near-term upside. Persistent (or increased)
skepticism could provide the fuel need to carry the popular averages higher.
Sentiment: Options traders and active
investment managers are bearish, but letter
writers and individual investors still optimistic.
Strongest Sectors: Health Care,
Consumer Staples and Utilities.
Recent small-cap leadership is encouraging, but more is needed to reverse the
year-long underperformance relative to large-caps. Additionally, breadth trends and index-level momentum remain suspect. The
percentage of industry groups in up-trends has now dropped to 44%, the lowest level in two years. While encouraged by the intraday and daily reversals seen last week, the jury is still out about whether the current move is more than an oversold bounce. If it
is, last week’s lows should not be broken on any re-test. A break above 1900 on the S&P 500 would be supportive as well.
Sentiment
Current
Previous
Indication
CBOE 10-Day Put/Call Ratio
Below 80% is bearish; Above 95% is bullish
112%
104%
Bullish
CBOE 3-Day Equity Put/Call Ratio
Below 53% is bearish; Above 64% is bullish
71%
76%
Bullish
VIX Volatility Index
Below 16 is bearish; Above 21 is bullish
22.0
21.2
Bullish
American Association of Individual Investors
Twice as many bulls as bears is bearish; more bears than
bulls is bullish
Bulls:
Bears:
42.7%
33.7%
Bulls:
Bears:
39.9%
31.0%
Neutral
Investors Intelligence (Advisory Services)
55% bulls and/or less than 18% bears is considered bearish
Bulls:
Bears:
37.8%
17.3 %
Bulls:
Bears:
45.5%
14.1 %
Bearish
National Assoc. of Active Investment Mgrs. (NAAIM)
Below 30% is bullish; Above 70% is bearish
10%
34%
Bullish
Ned Davis Research Crowd Sentiment Poll
Extreme Pessimism
Optimism Fading
Bullish
Ned Davis Research Daily Trading Sentiment Composite
Extreme Pessimism
Extreme Pessimism
Bullish
William Delwiche, CMT,CFA
Investment Strategist
[email protected]
414-298-7802
Weekly Market Notes
RS Ranking
Current
Previous
RS
Trend
Leaders:
Utilities
1
**
3
Health Care
2
**
1
Consumer Staples
3
**
2
Information
Technology
4
**
4
-
Telecom Services
5
6
+
Financials
6
5
Materials
7
8
Laggards:
Leaders:
Laggards:
Leaders:
Industrials
8
9
Laggards:
+
Laggards:
Leaders:
Laggards:
Leaders:
Laggards:
Leaders:
Laggards:
Leaders:
Laggards:
Leaders:
Leaders:
Consumer
Discretionary
Energy
9
7
Laggards:
10
10
Leaders:
Laggards:
** Denotes Current Relative Strength-Based Overweight Sectors
Sub-Industry Detail
Electric Utilities; Gas Utilities; Multi-Utilities & Unregulated
Power
HC Distributors; HC Facilities; Managed Health Care;
Biotechnology
Soft Drinks; Tobacco
Electronic Equipment & Instruments; Electronic Manufacturing
Services
Multi-Sector Holdings; Specialized Finance; Residential REIT's;
Retail REIT's
Life & Health Insurance
Diversified Metals & Mining
Environmental & Facility Services; Diversified Support Services;
Railroads
Construction & Engineering; Electrical Components & Equipment;
Trading Companies & Distributors; Security & Alarm Services
Footwear; Education Services; Distributors; Home Improvement
Retail
Auto Parts & Equipment; Tires & Rubber; Automobile
Manufacturers; Motorcycle Manufacturers; Leisure Products;
Broadcasting; Publishing; Internet Retail
Oil & Gas Drilling; Oil & Gas Equipment & Services; Oil & Gas
Exploration & Production; Coal & Consumable Fuels
**1 = strongest sector – 10 = weakest sector
S&P 500 and Industry Group Breadth
200%
2000
180%
1800
160%
1600
140%
1400
120%
1200
100%
1000
80%
800
60%
600
40%
400
Industry Group Up-Trend %
20%
200
S&P 500 (right)
0%
0
03
04
05
06
07
08
09
10
11
12
13
14
Source: FactSet, RWB Calculations
Robert W. Baird & Co.
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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.
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