Weekly Market Notes

Baird Market and Investment Strategy
Weekly Market Notes
January 20, 2015
Dow Industrials 17511
S&P 500 2019
Please refer to Appendix – Important Disclosures+
Volatility Often Leads to Opportunity
Summary
The equity markets declined for the second week in a row last week. Historically,
Economy: Deflation pressures mount
globally; Europe inflation is lowest on record;
there is a close relationship between the stock market’s performance in the first
U.S. CPI drops 0.4% in December. Retail
month of a new year and the final 12-month outcome. Stocks fell in January 2014,
sales fall in December.
however, and the S&P 500 finished with a nice gain. The worry in January 2015 is
that weakness in the global economy could spill over into the U.S. There is also
Fed Policy: Fed meets January 27-28. No
concern that the plunge in energy prices and a rising dollar will cause corporate
change in policy expected.
earnings growth to stall. Considering that most expect the Fed to raise rates this
summer, investors have been depending on rising earnings to validate lofty equity
Sentiment: Pessimism building;
valuations. Given the unstable global economic and geopolitical environment, we
approaching extreme readings.
believe it is premature to expect the Fed to alter course this year. Since inflation
rates are declining globally, and with the latest U.S. retail sales weaker than
Strongest Sectors: Defensive sectors top
expected in the fourth quarter, odds are the Fed will remain friendly toward the
relative strength leaderboard.
financial markets in 2015.
Although January losses have been confined to 2.0% or less, volatility continues to
be the new phenomena in 2015. The sharp rise in volatility has not been confined
to the equity markets. Bond prices have soared in the opening weeks of January and last week witnessed a huge increase in
volatility on the currency exchanges. The large price swings are being reflected in the jump in the CBOE Volatility Index (VIX).
The VIX has nearly doubled from below 12 in December to 21 at the close on Friday. Investors have been conditioned to view the
increases in the VIX as a negative. The record, according to Ned Davis Research, shows that since 1997 80% of the net gains in
the S&P 500 have occurred in the 15% of the time that the VIX has been above 29. The simple explanation for this is that high
periods of volatility are consistent with rising levels of investor fear. When fear levels reach an extreme, it typically represents a
good long-term buying opportunity. This is because there is a strong correlation between investor sentiment and liquidity. When
investors are fearful to the extreme, it likely means that sufficient liquidity has been established on the sidelines to support a good
rally. Although several of the sentiment indicators show extreme pessimism, we would like to see the bulls in the Investors
Intelligence data fall below 40% and the bulls in the survey from the American Association drop below 30%.
Sentiment
Current
Previous
Indication
CBOE 10-Day Put/Call Ratio
Below 80% is bearish; Above 95% is bullish
102%
99%
Bullish
CBOE 3-Day Equity Put/Call Ratio
Below 53% is bearish; Above 64% is bullish
72%
63%
Bullish
VIX Volatility Index
Below 13 is bearish; Above 19 is bullish
21.0
17.6
Bullish
American Association of Individual Investors
Twice as many bulls as bears is bearish; more bears than
bulls is bullish
Bulls:
Bears:
46.1%
21.5%
Bulls:
Bears:
41.0%
27.7%
Bearish
Investors Intelligence (Advisory Services)
55% bulls and/or less than 15% bears is considered bearish
Bulls:
Bears:
48.0%
16.3 %
Bulls:
Bears:
50.5%
15.2 %
Neutral
National Assoc. of Active Investment Mgrs. (NAAIM)
Below 30% is bullish; Above 80% is bearish
Ned Davis Research Crowd Sentiment Poll
Ned Davis Research Daily Trading Sentiment Composite
Bruce Bittles
Chief Investment Strategist
[email protected]
941-906-2830
87%
71%
Bearish
Optimism Fading
Optimism Fading
Bearish
Extreme Pessimism
Optimism Retreating
Bullish
Weekly Market Notes
RS Ranking
RS
Current
Previous Trend
Utilities
1
**
2
Health Care
2
**
1
Consumer Staples
3
**
3
Information Technology
4
**
5
Sub‐Industry Detail
Leaders:
Laggards:
Leaders:
Laggards:
Leaders:
Laggards:
Leaders:
5
**
Drug Retail; Food Retail; Distillers & Vintners
Home Entertainment Software
Laggards:
Leaders:
Consumer Discretionary
Electric Utilities; Multi‐Utilities & Unregulated Power
Independent Power Producers
Managed Health Care
4
Laggards:
Leaders:
Industrials
6
7
Financials
7
6
Telecom Services
8
9
Materials
9
8
Energy
10
10
Laggards:
Leaders:
Laggards:
Leaders:
Laggards:
Leaders:
Laggards:
Leaders:
Laggards:
Home Furnishings; Household Appliances; Housewares & Specialties; General Merchandise Stores; Home Improvement Retail; Automotive Retail
Auto Parts & Equipment; Leisure Products; Casinos & Gaming; Broadcasting; Internet Retail
Diversified Support Services; Human Resources & Employment Services; Airlines
Construction & Engineering; Electrical Components & Equipment; Construction Machinery & Heavy Trucks; Trading Companies & Distributors
Diversified REITs; Office REITs; Residential REITs; Retail REITs
Life & Health Insurance
Commodity Chemicals; Diversified Metals & Mining; Steel
Oil & Gas Drilling; Oil & Gas Equipment & Services; Integrated Oil & Gas; Oil & Gas Exploration & Production; Oil & Gas Refining & Marketing; Coal & Consumable Fuels
** Denotes Current Relative Strength‐Based Overweight Sectors ** 1 = Strongest sector 10 = Weakest Sector
Quarterly Data 12/31/1979 - 12/31/2014
Actual Inflation vs Expected Inflation
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
-1
Consumer
Price
Year-to-Year Change
12/31/2014 = 0.8%
(
)
Expected
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
-1
Index
10-Year
Consumer
12/31/2014 = 2.2%
(
)
Price
Inflation
Expectations Source: Survey of Professional Forecasters
1980
1985
1990
1995
2000
2005
2010
12/31/2014 = -1.4%
7
7
6
6
5
5
4
4
3
3
2
2
Inflation Higher than Expectations
1
1
0
0
-1
-1
-2
-2
Inflation Lower than Expectations
-3
-3
(E725)
CPI (Year-to-Year Change) minus Expected CPI
 Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
See NDR Disclaimer at
Robert W. Baird & Co.
www.ndr.com/copyright.html
. For data vendor disclaimers refer to
www.ndr.com/vendorinfo/
.
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 2015 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

Download Report