What the Market Wants: Renewed Volume and Strong Start to the Week

The ragged summer of 2010 is history, thank you very much, but despite an improved outlook for the economy, September drifted forward on very low trading volume last week, probably due to the holiday-shortened week (Labor Day on Monday and Rosh Hashanah on Thursday and Friday). The few economic reports we saw last week were positive, including slightly improved initial jobless claims, and the outlook improved for European banks. Nothing big, just more positive than negative news.

The result?  The S&P 500 was up +0.5% for the week; the Nasdaq, up almost as much, while the Russell 2000 was down a full percent. 

We should get back to normal trading activity this week. Sunday's announcement by the Basel Committee on Banking regarding new international capital requirements for banks seems positive for global growth, and was received warmly by the market.  As was the Treasury budget report, which was better than expected ($-90.5 B against an expected $-95.0 B and last month’s $-103.6 B).  The major indices ended the day up, all on strong volume: the S&P 500, +1.1%; the Nasdaq, +1.9%; and the Russell 2000, +2.5%.

The VIX fell to a fairly low reading of 21, which is a sign of less fear among investors.  Treasuries continued to fall today, as they did last week, but again on more volume. The dollar was down sharply, and oil prices rose.

Today is only one day's trading, but it looks as if we're off to a good start. There was plenty of short-covering, but the positive movement was broad.

Sectors.  From a sector viewpoint, Technology, Financials and Capital Goods stocks led the way. I think it is particularly positive that Technology was in the lead. Financials in second place was more or less expected, with the weekend's positive banking announcement. The Capital Goods sector's positive performance was no surprise, with the dollar being down. The classic flight-to-quality sectors -- Utilities, Healthcare and Consumer Services -- were at the bottom, a healthy sign for a recovering economy.

Coming up. The rest of the week is chockfull of economic reports. Tuesday, we have retail sales and business inventories; and Wednesday, export & import prices, industrial production & capacity utilization, and the Empire State manufacturing survey. On Thursday, we get the producer price index (PPI) and the weekly initial jobless claims report. On Friday, we'll see the consumer price index (CPI) and the Reuter's/University of Michigan's consumer sentiment index. Of all these, Wednesday's industrial production report and Friday's consumer sentiment report are the most important.

Despite the continuing issues of unemployment and government debt, the prospects for avoiding a double dip recession seem better than at any time during the summer. Valuations seem reasonable, and barring a group of significantly negative economic reports this week, I am cautiously optimistic. I would take a broad view toward investment prospects and look at large, mid and small-cap issues with a bias toward growth, which performed slightly better than value today.

4 Stock Ideas for This Market

This week, I used Sabrient's Hidden Gems preset search on MyStockFinder (http://MyStockFinder.com) to identify some interesting stocks that are "under the radar" of Wall Street. I also up-weighted Technicals. Here are 4 stock ideas to consider:

BMP Sunstone Corp. (Nasdaq: BJGP) – Healthcare
UFP Technologies (Nasdaq: UFPT) – Basic Industries
Audiovox Corp. (Nasdaq: VOXX) – Consumer Durables
VirnetX Holding Corp. (AMEX: VHC) - Technology

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC
Leaders in Investment Research
http://www.sabrient.com
and  http://Twitter.com/ScottMartindale

Full disclosure:  The author does not personally hold any of the stocks mentioned in this week’s “Stock Ideas.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.