What the Market Wants: Breaking Out or Topping Out?

by David Brown, Chief Market Strategist

David Brown

(Monday, October 12, 2009  4:55 pm) All major indices closed at or very near 2009 highs on Friday as the week featured a combination of better-than-expected economic news and a sprinkling of early earnings announcements on the plus side. From a technical perspective, the market is extended as the Dow reaches for 10,000 and the S&P500 aims for 1,100. Will it breakout now…or take a breather and wait for good earnings reports to provide the fuel to propel it?  This week should provide some clues.

New jobless claims dropped on Friday, representing the best of the good surprises, and a positive ISM report and early month-over-month strong retail reports fueled a 4% (large-cap) to 6% (small-cap) surge in market prices.   Value stocks did a little better than growth last week, but both were quite robust.

With regard to sectors, weakness in the dollar sparked a 9% price gain in the Materials sector, which, together with Energy (+7%) and Financials (+6%), topped the performance list, but all were in the black.  Consumer Staples, at the bottom, was still up nearly 3%, as were Utilities and Health Care.  These three sectors had been the leaders of the past few weeks in which recessionary caution had threatened to abort the rally which began in March.

The breadth of the market rise was best demonstrated by the fact that even the worst industry, Biotechnology, was up about 1%.

Important Week Ahead. This week’s corporate news will be a bellwether of the market’s trend, as a number of large market-moving companies make their third quarter earnings announcements.  These include on Monday (today), Schwab (Nasdaq:  SCHW); Tuesday,  Intel (Nasdaq: INTC) and Johnson & Johnson (NYSE: JNJ); Wednesday, JP Morgan (NYSE: JPM) and Abbott Labs (NYSE: ABT); Thursday, Advanced Micro Devices (NYSE:  AMD) and Citigroup (NYSE: C) (Thursday) .  Of course, many others will also be announcing, but this group has the ability to set the pace.

In addition, several new economic reports will be key to near-term stock performance.   On Wednesday, look for a crucial sales report, and on Thursday, a highly anticipated CPI report and more jobs data, followed by the Capacity Utilization Report on Friday.

The Sabrient SectorCast. As of today, our forward-looking SectorCast continues to rank Consumer Staples, Utilities and Health Care at the top, reflecting concerns of valuation in the lower sectors.  This concern coupled with a paucity of upward EPS revisions placed Telecom, Materials, and Industrials at the bottom of the rankings.

Click here to see the Market Stat tables, including the new forward-looking SectorCast rankings.

Especially due to the upcoming news this week, I recommend a continuation of a cautionary stance, taking profits on fully valued issues, looking for bargains, and where appropriate, hedging the downside.

4 Stocks for This Market . This week, I ran a MyStockFinder search (http://MyStockFinder.com) using the GARP (Growth At Reasonable Price) preset search, with Technicals upweighted. Here are four stocks ideas from the top-ranked sectors that look intriguing:
Costco Wholesale (Nasdaq: COST) – Consumer Staples
Hawaiian Electric (NYSE: HE) – Utilities
Hi-Tech Pharmacal (Nasdaq: HITK) – Healthcare (Biotech)
PartnerRe (NYSE: PRE) – Financials (Insurance)

Until next week,

David Brown
Chief Market Strategist

SABRIENT SYSTEMS, LLC
Leaders in Investment Research
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Full disclosure:  Neither Sabrient, David Brown nor Scott Martindale holds any of the stocks mentioned in this week’s “Stocks for this Market.”

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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.