Baird Market & Investment Strategy
Technical Review & Outlook January 19, 2017
Please refer to Appendix – Important Disclosures.
Technical Summary
What We Are Watching: • Indexes Continue Moving Sideways – Both the S&P 500 and the Dow Industrials continue to move sideways within a historically narrow range. This continues to weigh on momentum and short-term breadth continues to be relatively lackluster. While longer-term trends for price, momentum, and breadth remain generally strong, there are still areas struggling with longer-term resistance.
Trend: Trading range after December rally to new highs Momentum: Daily momentum is stalled Breadth: Long-term breadth trends still strong Sentiment: Most sentiment indicators point to excessive optimism
• Looking for Recent Leaders to Get Back in Gear – Evidence that the broad indexes are poised to resume their rally could first come from recent leaders getting back in gear. The Dow Transports are showing some evidence of leadership relative to the Industrials, and while the financial sector has been relatively resilient, we are not yet seeing renewed relative strength from the Broker/Dealer Index.
Macro: Bond yields rising again as economic data surprises to upside Key Near-Term Levels: S&P 500 – S: 2240; R: 2280
• Individual Investors Show More Caution, but Overall Optimism Still Elevated – The latest data from the AAII shows individual optimism at its
Russell 2000 – S: 1350, 1300; R: 1400 10-Yr T-Note Yld – S: 2.30%; R: 2.65%
lowest level since before the November election, while pessimism is at its highest level since prior to the election. This contrasts sharply with advisory service data that shows a new cycle high in optimism.
S&P 500 Dow Industrials Dow Transports NASDAQ Composite Russell 2000 Energy Materials Industrials Consumer Discretionary Consumer Staples Health Care Financials Information Technology Telecommunications Services Utilities VIX 10-Year T-Note Yield Gold Copper US Dollar Crude Oil
Last 2271.89 19804.72 9140.87 5555.65 1358.56 568.13 348.71 581.91 622.71 569.09 851.04 427.07 862.75 171.72 286.86 12.48 2.39 1212.10 2.62 100.92 51.08
Note: data as of January 18 close. Source: FactSet
William Delwiche, CMT, CFA Investment Strategist
[email protected] 414-298-7802 Twitter: @WillieDelwiche
50-Day Average Level Direction 2226.36 Up 19429.40 Up 9010.63 Up 5392.16 Up 1336.49 Up 562.55 340.88 574.35 609.98 558.93 837.46 419.59 837.56 167.76 279.46
Up Up Up Up Up Up Up Up Up Up
13.02 Down 2.36 Up 1186.82 Down 2.55 Up 101.26 Up 50.01 Up
*
200-Day Average Close to Close to 50-day to High/Low OB/OS Level Direction 50-day 200-day 200-day 13-Wk 52-Wk Daily Weekly 2148.31 Up Pos Pos Pos OB 18422.24 Up Pos Pos Pos OB 8132.98 Up Pos Pos Pos 5132.15 Up Pos Pos Pos OB OB 1222.77 Up Pos Pos Pos OB 529.89 Up 323.06 Up 535.95 Up 593.47 Up 574.38 Down 855.01 Up 368.99 Up 791.71 Up 169.81 Down * 285.88 Up * 14.20 Down 1.84 Up 1268.67 Down 2.25 Up 96.99 Up 47.10 Up
Pos Pos Pos Pos Pos Pos Pos Pos Pos Pos
Pos Pos Pos Pos Neg Neg Pos Pos Pos Pos
Pos Pos Pos Pos Neg Neg Pos Pos Neg Neg
Neg Pos Pos Pos Neg Pos
Neg Pos Neg Pos Pos Pos
Neg Pos Neg Pos Pos Pos
OB
OB OB OB
OB OS OB
OB OB OB OB
OS OB
OS OS OB
OS OB
Technical Review & Outlook
The S&P 500 has made a series of higher lows on the intra-day chart since the beginning of the year, but really remains firmly entrenched in a nearly two-month-long sideways trading pattern. Momentum does not yet suggest an upside breakout is imminent (nor does it suggest a breakdown is just ahead). We continue to view day-to-day swings within this range (2280 on the upside and 2240ish on the downside) as mostly just noise.
Source: StockCharts
Many areas of the market have used the last two months to consolidate breakouts to new highs (or in the case of the Dow Industrials repeatedly attempt to clear a new round-number threshold). The Value Line Geometric Index, on the other hand, has struggled to break through a long-term resistance level.
Source: StockCharts
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Technical Review & Outlook
The Broker/Dealer index rallied strongly in the second half of 2016 on both an absolute and relative basis. While it broke out to a new high on an absolute basis (and has spent the past two months consolidating above support), it did not make a new high on a relative basis (and has spent the last two months consolidating just below resistance). Momentum has pulled back and could be approaching an important support level, but there is little evidence that a price rally (either absolute or relative) is re-emerging.
Source: StockCharts
The Dow Transports are showing evidence of getting back in gear. The index has held support at its 50-day average, and the Transports have moved higher relative to the Industrials so far this year (after losing ground in December). Seeing an upturn in momentum and getting back above the late-2014/early-2015 highs could be evidence that a broader rally is set to resume.
Sources: StockCharts
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Technical Review & Outlook
We have been looking for an unwinding in investor optimism to help signal an end to the ongoing consolidation in stocks. Looking at this week’s data on individual investors from the AAII suggests we could be getting that. Bullish sentiment on that survey dropped 7 points and is at its lowest level since prior to the November election, while bearish sentiment rose by a similar amount and is at its highest level since the election.
Other sentiment surveys, however, suggest optimism is well entrenched. The Investors Intelligence data shows that among advisory services Bulls have moved to a new cycle high and bears have slipped to a new cycle low. Bears are at their lowest level since mid2015 while bulls are at their highest since mid-2014. This week the NAAIM Exposure index moved higher for the first time in four weeks, as active investment managers increased their allocation to equities. Overall, it is hard to suggest that excessive optimism has ceased to be a near-term headwind for stocks.
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Technical Review & Outlook
In our sector rankings, the Industrials sector has slipped from the third spot to the seventh spot over the past two weeks and is on the cusp of falling out of the leadership group. The chart confirms some of this recent relative price weakness. However, both the relative price line and momentum have pulled backed to support, while breadth and absolute price remain strong. While the sector may have gotten ahead of itself on a short-term basis, the longer-term trends are improving and it appears poised to remain a relative leader.
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Technical Review & Outlook
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 Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure and report performance of various sectors of the stock market; 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 2017 Robert W. Baird & Co. Incorporated Other Disclosures United Kingdom (“UK”) disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W. Baird Limited (“RWBL”) holds a MiFID passport. This material is distributed in the UK and the European Economic Area (“EEA”) by RWBL, which has an office at Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB and is authorized and regulated by the Financial Conduct Authority (“FCA”). For the purposes of the FCA requirements, this investment research report is classified as investment research and is objective. The views contained in this report (i) do not necessarily correspond to, and may differ from, the views of Robert W. Baird Limited or any other entity within the Baird Group, in particular Robert W. Baird & Co. Incorporated, and (ii) may differ from the views of another individual of Robert W. Baird Limited. All substantially material sources of the information contained in this report are disclosed. All sources of information in this report are reliable, but where there is any doubt as to reliability of a particular source, this is clearly indicated. Robert W. Baird Group and or one of its affiliates may at any time have a long or short position in the company/companies mentioned in this report. Where the Group holds a long or short position exceeding 0.5% of the total issued share capital of the issuer, this will be disclosed separately by your RWBL representative upon request. This material is only directed at and is only made available to persons in the EEA who would satisfy the criteria of being "Professional" investors under MiFID and to persons in the UK falling within articles 19, 38, 47, and 49 of the Financial Services and Markets Act of 2000 (Financial Promotion) Order 2005 (all such persons being referred to as “relevant persons”). Accordingly, this document is intended only for persons regarded as investment professionals (or equivalent) and is not to be distributed to or passed onto any other person (such as persons who would be classified as Retail clients under MiFID). Robert W. Baird & Co. Incorporated and RWBL have in place organizational and administrative arrangements for the disclosure and avoidance of conflicts of interest with respect to research recommendations. Robert W. Baird Group and or one of its affiliates may be party to an agreement with the issuer that is the subject of this report relating to the provision of services of investment firms. An outline of the general approach taken by Robert W. Baird Limited in relation to conflicts of interest is available from your RWBL representative upon request. Baird’s policies and procedures are designed to identify and effectively manage conflicts of interest related to the preparation and content of research reports and to promote objective and reliable research that reflects the truly held opinions of research analysts. Analysts certify on a quarterly basis that such research reports accurately reflect their personal views.
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Technical Review & Outlook
This material is not intended for persons in jurisdictions where the distribution or publication of this research report is not permitted under the applicable laws or regulations of such jurisdiction. Investment involves risk. The price of securities may fluctuate and past performance is not indicative of future results. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. You are advised to exercise caution in relation to the research report. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. RWBL is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the FCA under UK laws, which may differ from Australian laws. As such, this document has not been prepared in accordance with Australian laws.
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