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:
