What the Market Wants: And They're Off . . .

Stocks came strongly out of the gate last Monday to kick off the 2010 Wall Street race. And indeed the market advanced throughout the week, albeit fitfully, with the S&P 500 starting the week at 1114 and closing at 1144. So let's recap last week's market data for some insight on where we should be looking to invest now.

Large-cap Value took the early lead and was up 3.8 % for the week. The worst cap/style was, interestingly, Large-cap Growth, which was still up 1.8% for the week. Value did better than growth in each of the caps, primarily because of the Financial Sector's continued rally. Part of the blame for the lagging growth stocks is due to sporadic but realistic talk about valuations of large-cap techs, such as Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG). There was also concern, though not as noisy, about valuations in various Materials and Energy stocks.

In fact, Materials was the leading sector last week, continuing its countermove against the falling dollar, but even on Tuesday and Thursday (Jan 5th and 7th) when the dollar strengthened, the market moved inexorably ahead. Industrials and Financials were the other two leading sectors for the week, with the weakest sectors being those typically associated with recessionary worries -- Consumer Staples, Utilities and Healthcare -- although they were still positive for the week.

Click here to see the Market Stats.

Up until Friday, most of this made good sense as the ISM report, factory orders, and initial jobless claims were all at least mildly positive. But the market got a shock on Friday when the nonfarm payroll report showed a loss of another 85,000 jobs in December, when an increase of 10,000 was expected. Surprisingly, the market barely hiccupped. Stocks drifted minimally lower for a few hours and then resumed the race and closed the day at 1144, a new 52-week high for the S&P 500.

Then this morning (Monday), stocks charged out of the gate again, fueled in part by strong Chinese export growth, which shows global economic recovery. The S&P 500 hit another 52-week high of 1150, but those same valuation concerns about large technology companies took the Nasdaq into red figures and slowed the entire market to a meandering gait as it crisscrossed the line between slightly positive and slightly negative. The Dow and the S&P 500 recovered to close the day in positive territory (1147 for the S&P), but the Nasdaq remained negative, down -0.21%.

Alcoa (NYSE: AA) kicked off the quarterly earnings season with a gain of $0.01 (net of one-time charges) versus an expected gain of 6 cents, although revenues were slightly higher than expected. Alcoa's earnings miss helped to send its shares -- and the overall market -- lower in after-hours trading.

The Week Ahead. It is likely that the market will be cautious most of this week, as earnings reports flow in and new economic numbers are released (two reports to watch are retail sales on Thursday and CPI on Friday). There could still be plenty of excitement though, as any given positive or negative earnings report could set off waves of glee or gloom, but no meaningful direction is likely to occur until sometime next week, keeping in mind that this is an options expiration week. Consider also that Q4 of 2008 was a disastrous quarter, so we can expect that most companies will handily beat last year's numbers.

Our forward looking sectors continue to line up much as they have the past few weeks. Telecom leads, due to strong valuation, followed by a tight cluster of Consumer Staples, Energy, Healthcare and Utilities. Materials and Industrials are tied for the last spot, with Consumer Discretionary just a single point higher.

After the strong showing of value stocks last week, the prudent investor will continue to favor large caps and value stocks until the quality and direction of quarterly earnings are reasonably clear. Keep in mind that guidance has been quite positive for most companies over the last few months, so the market will likely deal harshly with negative surprises.

4 Stocks Ideas for this Market

This week, I ran our proprietary MyStockFinder stock search tool (http://MyStockFinder.com) starting with the Undervalued Large-Cap Growth pre-set search. However, I included both large and mid-caps, and allowed both Buy & Strong Buy ratings. Here are 4 stock ideas that might be worth a closer look:

America Movil (NYSE: AMX) – Telecom

InterDigital Inc.. (Nasdaq: IDCC) – InfoTech

Cephalon, Inc. (Nasdaq: CEPH) – Healthcare

NRG Energy (NYSE: NRG) -- Utilities

Until next week,

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 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 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.