Baird Market & Investment Strategy

Technical Review & Outlook

July 13, 2017

Please refer to Appendix Important Disclosures.

Technical Summary
Market Messages:

Patterns Broken; Patterns Persisting While the nearly month-long

Trend: Longer-term trends suggest path
of least resistance still higher
pattern of lower highs on the S&P 500 was broken this week, the narrow
trading range between 2405 and 2450 remains intact. This weeks move Momentum: Stocks still looking for
could set-up a test of the all-time highs reached in June (the Dow catalyst to break out of recent range
Industrials have already made a new high, as have small-cap growth
stocks and Emerging Markets). Breadth: Most areas of market trending
higher, although new highs are scarce
Optimism Easing, but Stocks Not Building Upside Momentum
Optimism remains elevated by most measures, but sentiment has been Sentiment: Lack of volatility leaves
shy of exuberant, and bullishness has faded somewhat in recent weeks. investors comfortably bullish
While that could help clear the way for a more sustained move higher, we
Macro: Elevated policy uncertainty and
are not yet seeing evidence that the upside momentum that could fuel
partisan conflict helping stocks
such a move is building.
Key Near-Term Levels:
Bond Yields Bounce We have, however, seen bond yields move S&P 500 S: 2405, 2350; R: 2450
higher and momentum there is expanding to the upside. While 2.40% has
emerged as a near-term resistance level, a re-test of the early year highs Russell 2000 S: 1400, 1355; R: 1430
near 2.60% could be seen in the second half. Such a move could be
10-Yr T-Note Yld S: 2.10%; R: 2.40%
bullish for Financials overall, and the Broker/Dealer index specifically,
which is on the cusp of breaking out relative the S&P 500.

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 2443.25 2416.99 Up 2303.58 Up Pos Pos Pos OB
Dow Industrials 21532.14 21174.59 Up 20086.99 Up Pos Pos Pos H H OB
Dow Transports 9716.32 9283.66 Up 9013.56 Up Pos Pos Pos H H OB OB
NASDAQ Composite 6261.17 6174.49 Up 5718.93 Up Pos Pos Pos
Russell 2000 1424.32 1399.70 Up 1349.81 Up Pos Pos Pos OB

Energy 486.90 496.40 Down 531.96 Down Neg Neg Neg OS

Materials 373.48 362.98 Up 348.76 Up Pos Pos Pos H H OB
Industrials 629.10 615.33 Up 585.62 Up Pos Pos Pos OB OB
Consumer Discretionary 664.03 665.44 Down 631.25 Up Neg Pos Pos
Consumer Staples 590.34 603.46 Down 582.57 Up Neg Pos Pos OS
Health Care 963.39 935.75 Up 881.18 Up Pos Pos Pos OB
Financials 455.33 440.37 Up 423.17 Up Pos Pos Pos OB OB
Information Technology 999.90 984.82 Up 900.06 Up Pos Pos Pos
Telecommunications Services 149.15 156.22 Down 164.18 Down Neg Neg Neg OS OS
Utilities 302.71 306.67 Up * 292.23 Up Neg Pos Pos OS

VIX 10.30 10.77 Up 12.39 Down Neg Neg Neg OS OS

10-Year T-Note Yield 2.33 2.26 Up 2.26 Up Pos Pos Neg OS OS
Gold 1219.10 1248.69 Down 1234.63 Down Neg Neg Pos OS
Copper 2.68 2.59 Up 2.54 Up Pos Pos Pos OB
US Dollar 95.51 97.21 Down 99.36 Up Neg Neg Neg OS OS
Crude Oil 45.49 46.63 Down 49.54 Up * Neg Neg Neg OS
Note: data as of July 12 close. Source: FactSet

William Delwiche, CMT, CFA

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

Coming into this week, the S&P 500 had

traced out a pattern of lower highs on a
short-term chart that stretched back to
the mid-June peak. After putting in a
sequence of higher lows, the S&P 500
was able to break above the emerging
down-trend. While momentum has
improved somewhat, it has yet to
suggest a breakout to new highs and a
sustained summer rally is emerging.

Source: StockCharts

The weekly chart captures this lack of

momentum more vividly. While the
price trend continues to be higher,
momentum stalled in the second
quarter and has yet to get back in gear.
This weekly chart also shows the
NAAIM Exposure Index, which has
edged lower over the past two weeks
and has remained shy of its first
quarter peak above 100. Overall, this
suggests that while the price trend is
higher, more consolidation may be
needed before the next meaningful leg
higher emerges.

Source: StockCharts

Robert W. Baird & Co. Page 2 of 7

Technical Review & Outlook

The advisory service sentiment survey

also shows an easing in optimism in
recent weeks. Bulls on this survey have
pulled back to 50%, the second lowest
reading of 2017. Bears however, have
not meaningfully risen. This leaves the
bull-bear spread below its peak, but still
at an elevated level. The AAII survey of
individual investors this week shows
bears exceeding bulls for the second
week in a row, which is hardly evidence
of exuberance.

Stock market breadth remains in

fine shape, but hereto, we are not
seeing evidence of a meaningful
breakout. Both the percentage of
stocks above their 50-day
averages and the percentage
above their 200-day averages are
between converging trend lines. A
modest positive is that the rising
trend in the percentage above their
50-day averages appears to be
accelerating.

Source: StockCharts

Robert W. Baird & Co. Page 3 of 7

Technical Review & Outlook

The yield on the 10-year T-Note has

bounced off of support near 2.15% and
the momentum up-trend that emerged
in 2016 remains intact. Near-term yield
resistance has emerged near 2.40%,
but the breakout in momentum could be
signaling that this is a pause, not a
peak. A retest of the early year highs
near 2.6% looks likely later this
summer.

Source: StockCharts

Accompanying the recent bounce in

bond yields has been a rally in the
Financials sector. We are looking
here specifically at the Broker/
Dealer index. Momentum is
improving and the index itself has
made a marginally higher high. We
are actually paying closer attention
to the relative price line that shows
the performance of the Broker/
Dealer Index to the S&P 500. A
breakout to new highs there could
be bullish for stocks overall and
suggest bond yields are set to
resume their move higher.

Source: StockCharts

Robert W. Baird & Co. Page 4 of 7

Technical Review & Outlook

From a price and breadth perspective,

the Industrials sector is moving toward
new highs (the sector-level ETF has
already made a new high). Momentum is
improving after having stalled earlier in
the year, and the relative price line
continues to trend higher off of the 2015
low.

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

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. Bairds
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.

Robert W. Baird & Co. Page 6 of 7

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.

Robert W. Baird & Co. Page 7 of 7