Look to Increase Equity Expo­sure Fol­low­ing an Expected Near-Term Pull­back

by Ryan Lewenza, VP, Senior U.S. Equity Ana­lyst, TD Waterhouse

Jan­u­ary 27, 2012

TD's (TD Water­house) Ryan Lewenza has just released (late last week) his U.S. Equity Strat­egy team's strat­egy report. In it he/they detail their case for increas­ing equity expo­sure fol­low­ing their call for a near-term pullback.

High­lights
• With the S&P 500 Index (S&P 500) up 5.5% since the begin­ning of the year and over 20% since its Octo­ber 2011 low, the U.S. equity mar­ket looks tech­ni­cally over­bought, and sus­cep­ti­ble to some near-term profit tak­ing, in our view. In deter­min­ing whether the equity mar­kets are overbought/oversold we look at a num­ber of tech­ni­cal indi­ca­tors, which at present, are paint­ing a rather clear pic­ture of a stretched and over­bought mar­ket. While we see the poten­tial for some near-term pres­sure over the next few weeks, we believe investors should take advan­tage of the poten­tial weak­ness and look to add to their equity expo­sure, given an improv­ing U.S. econ­omy and the recent liq­uid­ity injec­tion from the Euro­pean Cen­tral Bank.

• One of our pre­ferred mar­ket indi­ca­tors in iso­lat­ing extreme overbought/oversold mar­ket con­di­tions is the per­cent­age of New York Stock Exchange (NYSE) stocks above their 50-day mov­ing aver­age. Gen­er­ally, when this indi­ca­tor is above 80, it indi­cates an over­bought mar­ket, and over­sold when below 20. Cur­rently, this indi­ca­tor stands at 87, a level last seen in late Octo­ber 2011, and just before the S&P 500 cor­rected 10% over the fol­low­ing month.

• After hit­ting an eco­nomic soft patch last sum­mer, the U.S econ­omy has shown some resiliency, espe­cially in light of the head­winds ema­nat­ing from Europe. ISM man­u­fac­tur­ing has ticked higher recently, and with the sub-component New Order Index surg­ing in recent months (57.6 in Decem­ber, up from 49 in sum­mer 2011), we believe there may be more upside for the ISM index over the next few months, which if cor­rect, could con­tinue to sup­port a higher stock market.

• With the recent strength in the U.S. econ­omy and stock mar­ket we are tweak­ing our sec­tor rec­om­men­da­tions, by adding some cycli­cal­ity to our invest­ment strat­egy. In par­tic­u­lar, we are down­grad­ing util­i­ties from over­weight to mar­ket weight, and upgrad­ing the mate­ri­als sec­tor from under­weight to mar­ket weight.

• While we are down­grad­ing util­i­ties, we still believe investors should have some expo­sure to the sec­tor, given their defen­sive qual­i­ties and high div­i­dend yields. One name that stands out is Exelon Corp. (EXC-N). Exelon is one of the largest util­ity com­pa­nies in the U.S. and is the country’s largest nuclear operator.

You can read/download Ryan Lewenza's report in full, in the slid­edeck below; Fullscreen for the larger read:

U.S. Equity Strat­egy (Look to Increase Equity Expo­sure Fol­low­ing an Expected Near-Term Pull­back) — Janaury ...

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