What the Market Wants: A Bump in the Road or a Pothole?

by David Brown, Chief Market Strategist, Sabrient Systems

David Brown

Friday of last week seemed like a minor bump in the road as a small drop in the market allowed the week to end positive for mid caps and large caps but negative for small caps.  Mid-cap stocks, in fact, led the pack with a paltry 0.7% gain for the week. But after today’s (Monday) action, there are indications that we might be looking at something more like a pothole…or more ominously, a road construction detour.

The week’s results were triggered by slightly negative reports from consumer spending, which was unchanged versus an expectation of a slight gain. Consumer sentiment was somewhat better than expected, but below mid-July levels.

However, after the overnight sell-off in China, it is looking more like a pothole. The Shanghai Composite was down a full seven percent on reports of lowered equity purchases by managers.  Of course, the closing of another half dozen banks over the past week, including large banks in Texas and California, didn’t help investor attitude.

And today, the Chicago Purchasing Managers Index was a tad better than expected but nothing to get too excited about.  All of this news on the heels of the flat-revenue-but-positive earnings quarter resulted in a poor market day today.  At today’s close the S&P 500 had fallen nearly 20 points from its high of 1040 at mid-week last week.

Despite the bank failures, the Financials sector led the way last week, up 2%, but was negative today (Monday). Technology and Consumer Discretionary were both up around 1%, while Utilities, Energy and Consumer Staples were all down more than 0.5% last week. Today, everything was down except Consumer Staples, which eked out a small gain.

It is difficult to be too optimistic in light of the past week’s activities, although this is the last week of the dog days of summer, traditionally a low volume week.  Nevertheless, our Sabrient forecasted sector rankings are led by Utilities by a significant margin over Telecom and Health Care. Energy has finally fallen out of the top three, while Materials and Financials sit at the bottom. High valuation remains an issue in both those sectors.

This appears to be a good time for taking profits on fully valued positions and carefully looking for bargains in the positive sectors. In fact, as we enter September, which is historically the weakest month of the year (particularly following a strong August), we should all be prepared for at least the “pothole” scenario. But we might also position portfolios to deal with the “construction detour” possibility that could slow the market’s progress to a crawl, and perhaps even keep many participants off the road entirely (which could lead to a correction to as low as 940 support on the S&P 500). That might mean protective put options and other defensive positions (I entered some myself today).

[Click here to see the Market Stats.]

This week, I ran a MyStockFinder search (http://MyStockFinder.com ) using the High Growth preset search, but also upweighted Technicals . Here are a variety of stock ideas that look intriguing from the top-ranked sectors:

Vimpel-Communications (NYSE: VIP) – Telecom
Emergency Medical Services (NYSE: EMS) – Healthcare
Cal-Dive International (NYSE: DVR) – Energy
Protective Life Corp (NYSE: PL) – Financials (Insurance)

Until next week,

David Brown
Chief Market Strategist
SABRIENT SYSTEMS, LLC
Leaders in Investment Research
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