Investment Strategy Published by Raymond James & Associates

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1 Published by Raymond James & Associates Andrew Adams, CMT, (727) , December 7, 2016:Revised Charts of the Week : "Charts of the Week" We are coming to the end of yet another year, and for many this means it s finally time to sit down and take a good, hard look at those investment statements that have been arriving in the mail each month. The change of the calendar is a somewhat arbitrary delineation for performance reporting purposes you don t suddenly start over on January 1, after all but it does seem to be a hypothetical checkpoint along the way for all of us. Therefore, I thought it may help to do somewhat of a Year in Review lookback for 2016 to help with this analysis process. The charts within will provide a visual reflection of the last 12 months, but there are a few general points I d like to discuss here. First off, I think it pays to mention that we have called the last couple of years in the markets some of the most difficult we have ever seen, and, unless you happened to successfully rotate into the hot sectors and asset classes over time, you probably felt some pain along the way. Remember, we started the year in pretty scary times, with the average S&P 500 and Russell 2000 stock down 23% and 38% from 52-week highs, respectively, at the February lows. Outside of a major bear market, that is usually about as bad as it gets. And while the overall market has largely improved since then, it hasn t been a straight-up shot, and it certainly feels like each individual sector has taken its turn leading and lagging along the way. This sharpshooter type of market, therefore, can really separate the quality active money managers from the rest of the field and is why we think now is the time to be more tactical to really squeeze as much out of the market as possible. Also, keep in mind that the Dow Jones Industrial Average and the S&P 500 aren t necessarily representative of your account, especially the Dow, which is only 30 stocks. Moreover, the Dow happens to be price weighted, meaning that the higher price stocks have more of an impact on the performance of the index as a whole, which has allowed just three stocks to account for half of its big rally over the last month. I bring this up just in case your portfolio has not kept up with the Dow since the election and you are wondering why. Well, depending on your asset and investment mix, you could very well be doing better or worse than the major averages (they are averages, after all), so it is important to look under the surface into your holdings to really draw conclusions. And finally, remember to keep a long-term perspective when it comes to your goals and objectives. While it is generally agreed that diversification is best for most investors in the long run, it does mean you re likely to underperform the hottest areas of the market in the short run. For instance, if stocks are really hot and bonds are really not, but your account is split between 60% stocks and 40% bonds, you are almost certainly going to lag behind an account that is 100% stocks. However, over time, the relationship between different assets works to your advantage and helps smooth out the inevitable fluctuations in portfolio value. And with that, here are some charts to help summarize the stock market in 2016 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

2 Breadth Indicators YTD I usually include these breadth indicators over the last three months, but for the purposes of this report, it makes more sense to expand that to look at the entire year. And the big story, of course, has been the improvement in the number of stocks participating in the uptrend coming off the February lows. At the worst of the mess, just over 10% of the NYSE was above its 50-day moving average and about 1,400 more NYSE stocks were making new annual lows than were making highs. Those readings have drastically improved, and practically any breadth measure you look at tells the same story. And perhaps most importantly, the NYSE Common Stock Only Advance/Decline Line has made a new alltime high along with the major indices, confirming the breakout in stock prices. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

3 S&P 500 Summary The big story in 2015 was how only a handful of mega-cap stocks in the U.S. market were doing all the heavy lifting, which meant it was very easy to underperform indices like the S&P 500, which are weighted in favor of these big companies. Well, 2016 has been much more well-rounded, with more than half of the S&P 500 doing better than the index itself. In fact, 52.56% of S&P 500 stocks are beating the average, and a healthy 20.72% are up more than 30% on the year. Only one in four S&P 500 stocks is negative on the year, too, and there aren t that many doing extremely terrible. S&P 500 YTD Performance 8.23% % of S&P 500 with >30% Performance 20.72% % of S&P 500 with >20% Performance 34.06% % of S&P 500 with >10% Performance 54.58% % of S&P 500 with >0% Performance 75.03% % of S&P 500 with <-10% Performance 11.20% % of S&P 500 with <-20% Performance 5.37% % of S&P 500 with <-30% Performance 2.60% Source: FINVIZ.com; Raymond James Research (as of 12/6/16) International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

4 Sector/Market-Cap Breakdown While, overall, the market has been pretty good, there is still a very wide dispersion between performance in the different sectors and market-cap classes. According to the Finviz.com classifications, it s been the more tangible and production-oriented Basic Materials and Industrial Goods sectors that have done the best, while Health Care has been the real laggard over the course of the year. It s also been the year to be in the more speculative (and risky) areas of the market, with Small- and Mid-caps leading the way. Source: Finviz.com International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

5 A Tale of Six Markets When we look back over the course of the year, it becomes clear that we have really gone through six different types of market environments, which have, again, necessitated tactical action to really take advantage of what the market has given us. The percentage of NYSE Stocks Above the 50-Day Moving Average is the indicator in the lower panel and helps track breadth along the way. 1) We began with sharp weakness that was accompanied by very poor breadth readings. 2) Then, we entered an early recovery stage where breadth expanded along with the S&P ) Next, from mid-april to the Brexit vote in late June, the S&P 500 basically went sideways while the yield-sensitive and defensive areas of the market like Utilities and Consumer Staples were the place to be. 4) That gave way as the S&P 500 broke out to a new all-time high in early July and we began to see a rotation back into the more cyclical and higher beta areas. 5) That hot streak didn t last long, however, and we experienced soft and boring markets in the lead-up to the election in early November. 6) And finally, the post-election rally has shot prices back up and improved breadth readings greatly, and this is hopefully how we will end the year. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

6 For Bonds, A Tale of Two Halves While there are many different types of bonds that offer different opportunities, the 30-Year U.S. Treasury bond, at least, tells a very clear story in Those who owned bonds, either for speculative or diversification purposes, likely enjoyed the first half of the year a little more than those who were strictly invested in stocks. The price of the 30- Year was up just over 15% from the start of the year to early July, but then interest rates bottomed out before surging in the last few months. This, naturally, has put pressure on both bonds and stocks that are more yield-sensitive, and the 30-Year has responded by losing almost 15% and giving back the gains made in the first half of the year. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

7 Utilities Mirror Bonds And while yield-sensitive sectors like Utilities, Real Estate, and Telecom experienced a great run in the first half of the year, too, as interest rates fell, they have not been doing so hot since that July bottom in rates. Like bond prices, the year for Utilities can almost perfectly be divided in half, and the downtrend remains in effect as we approach the end of International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

8 Coming off Extreme Lows in Sentiment The difficult markets over the past two years had many investors throwing up their hands in exasperation. As a result, it was tough to find many people like us who really still believed in stocks. In fact, market sentiment was horrible for most of this year and reached levels that typically signify bear markets. The weekly American Association of Individual Investor survey did not have a 40% bullish reading until after the election in November, and several weeks saw bullish sentiment creep under 25%. And even after the sharp rise in optimism over the last month, we are still nowhere near prior peaks in sentiment. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

9 Speculation Picking Up One of the big stories over the last couple of years has been the underperformance of the more speculative areas of the market like small-cap stocks. In a healthy, strong market, we want to see speculation (though not at extreme, bubble levels), since that is a sign of optimism and the willingness to take on more risk. Well, 2016 has finally seen speculation pick back up, with the Russell 2000 (small cap) index largely outperforming the S&P 500 for most of this year. The relative strength line in this chart goes up when the Russell 2000 is outperforming and falls when the S&P 500 is outperforming, and it s clear that the trend has been up since the February lows. This is a favorable sign and will hopefully continue into International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

10 Broad Rally Has Helped Improve Overall Conditions The participation of more stocks in the bull market (good breadth) has really helped make things feel a whole lot better than they did at the beginning of This is important, too, since it is the increase in optimism and buying support that helps drive stock price appreciation in the short term. As previously stated, this is no longer a market where only a handful of stocks are doing well, which means the equal-weighted version of the S&P 500 is doing better than the traditional, market-cap weighted version that we are more used to. It s really been a mirror image of 2015 if you take a look at the relative strength chart between the two S&P 500 indices, and I think most would agree that is a good thing. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

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