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Baird Market & Investment Strategy

Technical Review & Outlook
June 22, 2017

Please refer to Appendix – Important Disclosures.

Technical Summary
Market Messages:

• Looking for New Leaders – Heading toward the halfway point for 2017,
Trend: New highs suggest the path of
least resistance for stocks is higher
the stock market is seeing some rotation as the search is on for potential
second-half leaders. European stocks have pulled back to support after Momentum: Momentum trends stronger
being early leaders this year. Small-caps enjoy better momentum and for small caps than large caps
price trends than large-caps (even though relative strength has favored
large-caps). After a recent surge, Health Care is poised to overtake Tech Breadth: Uptick in new lows bears
as the top-performing sector for 2017. watching, but for now breadth still OK

• Calm Markets Add to Investor Complacency – There are multiple ways Sentiment: Lack of volatility leaves
to describe the relative calm that stocks have seen in the first half of 2017: investors comfortably bullish
single-digit readings on the VIX, the second-smallest peak-to-trough first
Macro: Bonds not echoing Fed
half decline for the S&P 500 on record or the 250 days since the last 5%
optimism on the economy
pullback. The effect has been to leave investors relatively complacent.
Key Near-Term Levels:
• Decline in Oil Could Be a Positive for Stocks – While transitioning S&P 500 – S: 2400, 2350; R: 2450
leadership and elevated optimism could mean increased volatility for
stocks in the second half of 2017, do not expect the recent drop in oil Russell 2000 – S: 1350, 1330; R: 1425
prices to necessarily precipitate weakness in stocks. In fact, declines in
10-Yr T-Note Yld – S: 2.10%; R: 2.25%
the dollar-adjusted price of oil have historically been quite bullish for

50-Day Average 200-Day Average Close to Close to 50-day to High/Low OB/OS
Last Level Direction Level Direction 50-day 200-day 200-day 13-Wk 52-Wk Daily Weekly
S&P 500 2435.61 2398.30 Up 2284.36 Up Pos Pos Pos OB
Dow Industrials 21410.03 20980.85 Up 19866.72 Up Pos Pos Pos OB OB
Dow Transports 9292.61 9154.88 Up 8897.10 Up Pos Pos Pos OB
NASDAQ Composite 6233.95 6106.05 Up 5653.17 Up Pos Pos Pos OB
Russell 2000 1399.25 1391.37 Up 1337.42 Up Pos Pos Pos OB

Energy 480.69 505.86 Down 534.46 Down Neg Neg Neg L L OS
Materials 362.74 360.46 Up 345.49 Up Pos Pos Pos OB
Industrials 618.10 609.38 Up 579.11 Up Pos Pos Pos OB
Consumer Discretionary 663.77 663.49 Up 626.00 Up Pos Pos Pos OS OB
Consumer Staples 607.14 604.03 Up 581.21 Up Pos Pos Pos OS
Health Care 966.01 917.38 Up 874.60 Up Pos Pos Pos H H OB OB
Financials 443.06 434.74 Up 416.76 Up Pos Pos Pos OB
Information Technology 990.84 972.66 Up 888.30 Up Pos Pos Pos
Telecommunications Services 155.61 159.21 Down 165.41 Down Neg Neg Neg OS
Utilities 312.78 306.07 Up 291.06 Up Pos Pos Pos OB

VIX 10.75 11.39 Down 12.66 Down Neg Neg Neg OS
10-Year T-Note Yield 2.16 2.25 Down 2.22 Up Neg Neg Pos OS OS
Gold 1245.80 1261.18 Down 1241.52 Down Neg Pos Pos OS
Copper 2.60 2.57 Down 2.50 Up Pos Pos Pos
US Dollar 97.22 98.20 Down 99.32 Up Neg Neg Neg OB OS
Crude Oil 42.53 48.34 Down 49.56 Down * Neg Neg Neg L OS OS
Note: data as of June 21 close. Source: FactSet

William Delwiche, CMT, CFA
Investment Strategist
Twitter: @WillieDelwiche
Technical Review & Outlook

The Euro STOXX 50 index has pulled
back to support on both an absolute and
relative price basis, suggesting the
uptrend that emerged over the course of
the second half of 2016 could be set to
re-emerge in the second half of 2017.
The caveat is that as price has
consolidated, momentum has slipped
out of gear.

Source: StockCharts

The small-cap Russell 2000 has lost
relative strength versus large-caps
over the course of 2017. Two attempts
to re-assert relative leadership have
not produced any follow-through. On
an absolute basis, however, small-
caps continue to trend higher on both
and intermediate-term and longer-term
basis. Focusing only on the relative
price trend can obscure this strength.
Moreover, the momentum trend
remains higher (and in better shape
than large-cap momentum). This could
help support small-cap leadership in
the second half of the year.

Source: StockCharts

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Technical Review & Outlook

The 3.2% peak-to-trough decline in the
S&P 500 in the first half of 2017 was the
smallest such decline since 1995 and is
the second smallest on record. The
S&P 500 is now closing in on 250 days
since the last 5% correction, which is
the longest since the mid-1990s and is
three times as long as the average in
bull markets. The lack of volatility in the
first half of 2017 has left investors
comfortably optimistic, but this could
sow the seeds of increased volatility in
the second half.

Source: Ned Davis Research

This week’s sentiment surveys
reveal this investor complacency.
As a whole the surveys were little
changed versus last week (in fact
the NAAIM Exposure index was
exactly the same, out to two
decimal places). While not
necessarily showing euphoria,
there is certainly an absence of
skepticism in these sentiment
numbers. Fund flows from last
week revealed increased optimism.
According to ICI, equity funds
attracted $27 billion in inflows ($20
billion of that was for domestic

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Technical Review & Outlook

Investor complacency could become
especially problematic if breadth
deteriorates. So far, breadth trends
remain strong even as stock market
leadership undergoes some rotation.
This has left relative few areas of the
market making new highs (from a sector
perspective only Health Care and
Industrials joined the S&P 500 in
making new highs this week). If the lack
of new highs persists, and the new low
list (which has been dominated by
Energy and Retail names) expands, it
could suggest deterioration in the broad
market that could take further
consolidation to resolve.

Source: StockCharts

Weakness in the Energy sector
(down over 3% this week) can be
attributed to weakness in the price
of crude oil, which moved to its
lowest level of the year this week.
Rather than a cause for concern,
the decline in the dollar-adjusted
price of oil has historically been
bullish for stocks. In other words,
while weakness in oil may be a
headwind for the Energy sector,
history suggests it is unlikely to be a
catalyst for weakness in the stock
market overall.

Source: Ned Davis Research

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Technical Review & Outlook

At perhaps the point of maximum focus
on the handful of large-cap technology
companies that were purportedly holding
up the entire stock market, the Health
Care sector broke out to new highs and is
now challenging Technology for the top-
spot in year-to-date sector performance.
Breadth in the Health Care sector is
supportive and momentum is expanding.
The relative price line is moving in a
positive direction, although a longer-term
downtrend line could be a source of

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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.


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United States Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and
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the laws and regulations governing United States broker-dealers and not Australian laws.

Copyright 2017 Robert W. Baird & Co. Incorporated

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Technical Review & Outlook

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