Baird Market & Investment Strategy

Technical Review & Outlook

December 21, 2017

Please refer to Appendix – Important Disclosures.

Technical Summary
Market Messages:
Trend: Longer-term trends suggest
• Path Of Least Resistance Remains Higher – The cyclical trend that
cyclical rally remains intact
emerged off of the early 2016 lows remains intact and the path of least
resistance for stocks remains higher. Breadth is generally supportive and Momentum: Stocks still enjoying a
new index-level highs have been accompanied by improving momentum. momentum tailwind
• Individual Investors Turning More Optimistic – Pockets of optimism
Breadth: Most areas of the market
have been present in the market all year long, but with the recent increase remain in longer-term up-trends
in bulls on the AAII survey of individual investors, it appears the excessive
optimism is becoming more universal. This alone may not disrupt the Sentiment: Excessive optimism
underlying trend in stocks, but could contribute to a bumpier ride in 2018. becoming almost universal

• Bond Yields Heading Higher – Bond yields in both the U.S. and Macro: Rising bond yields could present
Germany have moved off of their recent lows, with the 10-year T-Note a new challenge for stocks in 2018
yield moving towards its early-year peak above 2.60%. This move higher
Key Near-Term Levels:
in yields has been echoed by a bounce in copper prices. With economic
S&P 500 – S: 2650, 2600; R: 2700
growth accelerating and central banks becoming less friendly, this could
be the beginning of a more protracted move higher in yields. Russell 2000 – S: 1510, 1475; R: 1550
• Thanks for reading, hope you have a merry Christmas, and best 10-Yr T-Note Yld – S: 2.20%; R: 2.60%
wishes for a prosperous 2018!

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 2679.25 2602.32 Up 2472.94 Up Pos Pos Pos OB OB
Dow Industrials 24726.65 23696.12 Up 21993.03 Up Pos Pos Pos OB OB
Dow Transports 10628.74 9934.94 Up 9467.47 Up Pos Pos Pos H H OB OB
NASDAQ Composite 6960.96 6763.96 Up 6337.46 Up Pos Pos Pos OB OB
Russell 2000 1540.08 1507.21 Up 1430.25 Up Pos Pos Pos OB

Energy 532.67 517.54 Up 505.23 Up * Pos Pos Pos H OB

Materials 406.58 398.26 Up 374.57 Up Pos Pos Pos H H OB OB
Industrials 682.14 657.22 Up 626.26 Up Pos Pos Pos H H OB OB
Consumer Discretionary 731.35 695.21 Up 669.81 Up Pos Pos Pos OB OB
Consumer Staples 619.34 596.10 Up 597.82 Up Pos Pos Neg OB OB
Health Care 1012.07 996.52 Up 957.05 Up Pos Pos Pos OB OB
Financials 509.98 490.65 Up 457.98 Up Pos Pos Pos OB OB
Information Technology 1151.04 1123.00 Up 1023.83 Up Pos Pos Pos OB OB
Telecommunications Services 164.28 151.84 Up 157.22 Down Pos Pos Neg OB OB
Utilities 310.67 322.39 Down * 311.83 Up Neg Neg Pos OS

VIX 9.72 10.40 Down 11.01 Down Neg Neg Neg OS

10-Year T-Note Yield 2.50 2.37 Up 2.30 Down Pos Pos Pos H OS OS
Gold 1267.80 1276.57 Down 1269.29 Up Neg Neg Pos OS
Copper 3.18 3.11 Up 2.83 Up Pos Pos Pos OB
US Dollar 92.89 93.69 Down 95.54 Down Neg Neg Neg
Crude Oil 58.09 55.54 Up 50.14 Up Pos Pos Pos OB
Note: data as of December 20 close. Source: FactSet

William Delwiche, CMT, CFA

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

The path of least resistance for stocks

remains higher, with both price and
momentum trends for the S&P 500
rising. One minor caveat is that
momentum is approaching the peak
levels seen over the course of the past
two years. If momentum cools and
prices re-trench, look for support
beginning near 2600. This may be more
of story for 2018, however, as the allure
of reaching 2700 by year-end could be
hard to resist.

Source: StockCharts

Breadth has been bullish all year, even

as some deterioration was seen. More
recently, however, the percentage of
industry groups in up-trends has
expanded. The cyclical rally in the
popular averages continues to be
supported by sector-, industry group-,
and issue-level trend indicators.

Robert W. Baird & Co. Page 2 of 7

Technical Review & Outlook

The latest data from the AAII shows that

individual investors have turned more
optimistic. Bulls have surged from
below 30% in mid-November to above
50% this week. This is the most bulls
since late-2014/early-2015. Bears have
fallen in recent weeks, but remain below
the trough readings that occurred earlier
in 2017.

New-found optimism among

individual investors matches what
is seen on most other surveys of
investor sentiment. Advisory
services bulls have been above
60% for two months, and the
NAAIM Exposure Index, which
measures equity exposure among
active investment managers,
surged to its highest level on
record last week (before giving
some back this week). Optimism
tends to run high heading into
year-end, and with the stock
market performance of 2017 there
is little reason to expect this year to
be different. A better gauge of
sentiment could be what happens
with investor psychology if/when
volatility picks up next year.

Robert W. Baird & Co. Page 3 of 7

Technical Review & Outlook

The yield on the 10-year T-Note has

climbed since testing and holding
support at the extension of the down-
trend line near 2.1% in September.
More recently it held support near 2.3%
and has broken out to its highest level
since the first quarter. Clearing
resistance near 2.60% would be the
next meaningful threshold. German
Bund yields have also picked up, and if
the T-Note is going to clear 2.60%, the
Bund yield will likely have to exceed
0.60%.

Source: StockCharts

Supporting the move higher in bond

yields has been the recent rebound
in copper prices. Copper had been
leading yields higher, but has spent
most of the fourth quarter
consolidating between 3.20 and
2.90. Support has held and copper
is now testing the upper end of that
range. A fresh break-out could clear
the way for bond yields to follow
suit.

Source: StockCharts

Robert W. Baird & Co. Page 4 of 7

Technical Review & Outlook

Also consistent with a rebound in bond

yields has been the performance of the
Financials sector. Momentum has
improved in the sector and it has made
new highs on both an absolute and
relative price basis. Particularly
encouraging has been the strength seen
in the Broker/Dealer index (which has
been making new absolute and relative
price highs of its own). After slipping
briefly in November, the Financials sector
has been among the top two sectors in
our relative strength rankings for the past
three weeks.

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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