Baird Market & Investment Strategy

Technical Review & Outlook

June 1, 2017

Please refer to Appendix Important Disclosures.

Technical Summary
What We Are Watching:

Support Holds; Resistance Folds There are a variety of ways to

Trend: Long trends remain higher as
rally resumes on breakout
characterize an up-trend. One that seems apropos of late is the pattern of
support holding and resistance folding. The effect has been that pullbacks Momentum: Momentum trends not
on the S&P 500 have been limited and it has moved further into record arguing for near-term acceleration
territory even as momentum has cooled in 2017.
Breadth: Rally is broader than just a
Sector-Level Trends Improving A popular narrative right now is that handful of Tech stocks
the market is being supported by just a few large-cap (mostly Tech) stocks
and this poses a risk for the overall market. Looking beneath the surface, Sentiment: Seeing optimism, but not
most sectors are making new highs and sector-level trends are turning euphoria
higher. This is evidence that domestic breadth trends are improving and
Macro: Political uncertainty provides a
the popular averages continue to enjoy support from the broad market.
wall of worry to be climbed
Sentiment Shows Optimism Mixed With Skepticism Advisory Key Near-Term Levels:
services and active investment managers continue to show elevated S&P 500 S: 2400, 2350; R: 2450
levels of optimism (although a bit less than last week and shy of
euphoria). Individual investors, according to AAII, are more bearish than Russell 2000 S: 1350, 1330; R: 1425
bullish, although mostly they are neutral. Options data shows a healthy
10-Yr T-Note Yld S: 2.20%; R: 2.65%
and rising demand for put options evidence of skepticism even as stocks
rally.

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 2411.80 2373.98 Up 2265.13 Up Pos Pos Pos OB OB
Dow Industrials 21008.65 20790.10 Up 19657.70 Up Pos Pos Pos OB
Dow Transports 9163.90 9065.77 Up 8787.44 Up Pos Pos Pos OB
NASDAQ Composite 6198.52 5995.59 Up 5578.05 Up Pos Pos Pos OB OB
Russell 2000 1370.21 1377.85 Down 1324.79 Up Neg Pos Pos

Energy 490.28 516.18 Down 537.20 Down Neg Neg Neg L L OS OS

Materials 359.21 357.65 Down 342.64 Up Pos Pos Pos OB
Industrials 612.05 601.62 Up 573.08 Up Pos Pos Pos OB
Consumer Discretionary 670.50 655.75 Up 620.86 Up Pos Pos Pos OB
Consumer Staples 612.75 598.13 Up 579.49 Up Pos Pos Pos H H OB
Health Care 919.08 904.84 Up 870.39 Up Pos Pos Pos OB
Financials 426.37 432.71 Down 410.82 Up Neg Pos Pos
Information Technology 996.33 953.15 Up 874.29 Up Pos Pos Pos OB OB
Telecommunications Services 158.20 161.76 Down 166.45 Down Neg Neg Neg OB OS
Utilities 312.08 302.46 Up 289.15 Up Pos Pos Pos H H OB OB

VIX 10.41 11.99 Down 12.82 Down Neg Neg Neg OS OS

10-Year T-Note Yield 2.20 2.32 Down 2.17 Up Neg Pos Pos OS OS
Gold 1275.40 1256.09 Up 1246.49 Down Pos Pos Pos OB
Copper 2.58 2.59 Down 2.47 Up Neg Pos Pos
US Dollar 96.85 99.11 Down 99.18 Up Neg Neg Neg L OS OS
Crude Oil 48.32 49.59 Up 49.63 Up Neg Neg Neg
Note: data as of May 31 close. Source: FactSet

William Delwiche, CMT, CFA

Investment Strategist
wdelwiche@rwbaird.com
414-298-7802
Twitter: @WillieDelwiche
Technical Review & Outlook

While momentum on the S&P 500

stalled in the first quarter, the index has
continue to grind out gains. March and
April were characterized by both support
and resistance holding steady. As we
have moved toward summer, support
has continued to hold and it is
resistance that we have seen fold. That
has cleared the way for the S&P 500 to
make new highs and reinforces the view
that the path of least resistance remains
higher.

Source: StockCharts

Despite concerns to the contrary, the

S&P 500 is not alone on an island.
Small-caps have struggled relative to
large-caps in 2017 (the bottom clip
shows the performance of the Russell
2000 to the S&P 500). On an absolute
basis, however, the Russell 2000
remains in an up-trend on both a price
and momentum basis. In fact the
momentum up-trend for the Russell
2000 off of the 2016 lows remains
intact, while it has been broken for the
S&P 500.

Source: StockCharts

Robert W. Baird & Co. Page 2 of 7

Technical Review & Outlook

The Dow Transports are also still in an

up-trend from both a price and
momentum perspective, even though
they have lost ground to the Dow
Industrials on a relative price basis in
2017. After holding support at the 200-
day average, however, the Transports
have rallied strongly and are testing
resistance on both an absolute and
relative price basis.

Source: StockCharts

The examples of Small-caps and

the Dow Transports can be
expanded to sector-level trends.
This week we have seen six of 10
cap-weighted sectors making news
highs, with a potential seventh less
than 1% away from its high. From
an equal-weight perspective, the
equal-weight S&P 500 has moved
to a new high and seven of nine
equal-weight sector ETFs are
within 1% new highs. In other
words, while there is evidence that
a handful of large-cap stocks are
pacing the market, they are not the
only thing holding up the market at
this point. Our sector-level model
that looks at price, breadth and
momentum trends has improved
sharply over the past two weeks,
and could provide support for
further strength in the S&P 500.

Robert W. Baird & Co. Page 3 of 7

Technical Review & Outlook

Sentiment surveys continue to offer a

mixed bag of evidence. Both the NAAIM
and Investors Intelligence surveys this
week showed a pullback in bullishness,
but optimism remains elevated. The
AAII survey again shows more bears
than bulls, although if there is euphoria
anywhere in that survey it is probably
among the neutral respondents (41%
this week). What has caught our eye
this week as been persistent strong
demand for put options. The 10-day
CBOE put/call ratio is rising sharply
even as stocks move to new all-times
highs. The displays a healthy level of
skepticism even amid evidence of some
degree of optimism in some of the
sentiment surveys.

The recent decline in bond yields

speaks to uncertainty about the
outlook for the U.S. economy and
skepticism about stocks. This
skepticism has had and continues to
have bullish implications for stocks.
The 10-year T-Note yield has pulled
back to support near 2.20%. The
peak yield for the year at 2.60% in
the first quarter remains an
important resistance level. If
confidence in the economy returns,
this level could be tested in a
relatively short period of time.

Source: StockCharts

Robert W. Baird & Co. Page 4 of 7

Technical Review & Outlook

If bond yields do move back toward their

early-year highs, the Financial sector
could see renewed interest. So far, the
trends do not offer much evidence that
this will be the case. Breadth in the sector
has been relatively strong, but
momentum remains in a downtrend
(defined by lower highs and lower lows)
and price has stalled on an absolute and
relative basis. The up-trends that
emerged over the course of 2016 do
remain intact but got over extended in the
fourth quarter of last year.

Robert W. Baird & Co. Page 5 of 7

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

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Technical Review & Outlook

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