26
Sep
2011

What the Market Wants: On a Wing and a Prayer

On a Wing and a Prayer

By David Brown, Chief Market Strategist, Sabrient Systems

After the worst weekly performance since 2008, the market headed into a new week on an upswing in hopes that the European debt situation is stabilizing.  There’s still no concrete action, as of this writing, just talk of plans, but that was enough to reassure the skittish markets.  On this hope, and maybe a prayer or two, the S&P 500 and the Dow gained more than +2% today with the Nasdaq moving up +1.3%.

Banks and financial institutions led today’s advance. Oil was up solidly, and the dollar was down, the latter fueling the markets’ rise as usual.   The VIX (the “fear index” that measures the implied volatility of the S&P 500) was near 40 again, reflecting investors’ nagging fears.  (As recently as August 3 the VIX was below 25).

Until the euro zone actually takes action to stabilize Europe’s deteriorating financial system, we’ll go right back to the uncertainty that cratered the markets last week when the S&P 500 fell -6.5% and the Russell 2000 dropped almost -9%.  The market abhors uncertainty, but that’s what it has had to deal with both at home and in Europe.  At home, the uncertainty centers on the moribund economy and whether or not Congress will pass any of the Obama jobs bill.

As for the economy, the housing market is still mixed. New home sales were a tad better than expected though still worse than last month. Existing home sales, which don’t directly help the economy, were up+7% over the previous month.  Housing permits—which do have a direct effect on the economy, especially if positive—were better than expected and well above last month.  At 0.571M, housing starts were flat, and lower than the expected 0.592M. New home sales are at a 9-month low (295,000), down 7,000 from last month.  Initial jobless claims improved slightly last week, although stubbornly staying above the 400K level, at 423,000.

Upcoming economic reports include consumer confidence and S&P Case-Shiller Home Price Index (Tuesday);  durable goods (Wednesday); initial jobless claims, pending home sales, and the National Association of Realtors’ pending home sales index (Thursday); and the consumer sentiment index, Chicago PMI, and personal income and outlays (Friday).

Here are the market stats.

Market stats. Last week, the style/caps were all down between -6.75% (Large-cap Growth) and -9% (Small-cap Value).  It is notable that Large-cap Growth has now “run the table,” handily beating all style/caps this week and the last 1, 3, 6, and 12 months.   The bottom line is, the market wants large-cap growth stocks.

From a sector viewpoint, it was a pure flight to safety with the best-performing sectors being Utilities, Health Care, and Consumer Non-durables, each down about -4%.  Indicative of the concern over economic growth was the fact that Basic Industries was the worst performer, down a shocking -13% for the week.   Energy was also down double-digits (-10%), and Finance, Transportation and Capital Goods all lost -8% or more.

Our previous sector forecast, which had been strongly impacted by the Obama jobs announcement and speculation that that the European problem would be solved, projected the exact opposite for the top and bottom two sectors.  The current SectorCast continues to favor Basic Industries, based on strong returns on equities within that group of stocks and conservative forward P/Es, due to the sell-off since late July.

4 Stock Ideas for this Market

This week, I started with the Undervalued Large Cap Growth preset search in MyStockFinder (http://MyStockFinder.com). I also included Buys (in addition to Strong Buys) and slightly up-weighted Technicals. Here are four stock ideas that look intriguing in this shaky market:

AutoZone (AZO) – Consumer Durables
Perrigo Company (PRGO) – Healthcare
Dollar Tree, Inc. (DLTR) – Consumer Services
Ralph Lauren Corporation (RL) – Consumer Non-durables

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC.
Leaders in Investment Research
http://www.sabrient.com
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Full disclosure: The author holds no positions in the stocks selected for 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.

What the Market Wants
david / Tag: AZO, DIA, DLTR, PRGO, RL, SPY, VIX /