WHAT THE MARKET WANTS: Global Malaise versus US Earnings: Unusual Dichotomy

Unfortunately, the dismal attitude we conveyed last week, was fulfilled with one of the worst weeks the market has had in some time.  The S&P 500 has fallen almost 15% from its April highs and is now below all of its moving averages, including the 200-day moving average.

It’s probably worth spending a few minutes looking at the cap-style table for performance. You will note that last week’s losses wiped out all the previous week’s gains plus some, and that the best place to be was Large-cap Growth, down -4% for the week, while Small-cap Value was the worst place to be, down -7% for the week.

The one-month column shows that we’re now into a rather bad month, having lost approximately 10% no matter what we held, unless it was gold.  And indeed, even going back three months now, the large caps and most of the mid caps are in negative territory, and negative numbers have bled over into the 6-month Large-cap Growth.

Not all that we see is negative. Inflation continues to be contained, for which we are grateful, but we have a dichotomy between the gloomy global situation and rose-colored vision of Corporate America.

At the global level, we have the troublesome European debt crisis and the North Korean saber-rattling, and here at home, we are plagued by our own significant unemployment and record deficits, an unexpected drop in LEI, as well as the pending reform of Wall Street. At the corporate level, the picture looks rosy when you consider corporate profits and forecasts, as well as the analysts’ upward revisions to earnings forecasts.

So what’s an investor to think?

For the most part, particularly after last week’s losses, valuations are reasonable and in fact there are a number of excellent bargains which is always the case after a significant sell-off.  Nonetheless, it is unlikely that we’ve reached the bottom of this pullback.  The next major support for the S&P 500 is 1035, about 40 points or 4% lower than today’s close of 1073. There is no particular reason to think that support will hold at that level, other than it will be closing in on a 15% decline from the 52-week high in a market that is not unreasonably valued. So I think we have a 50-50 chance of support at that level. I’m well aware of other prognosticators who feel it will drop much lower, and it might . . . but I think it more likely that it will find support above 950.

We’ll have to wait and see what the week brings.  The market moving economic indicators to watch for this week are consumer confidence on Tuesday and durable goods on Wednesday. Of course, other events can move the market, too, and sometimes dramatically.

Sectors. Given the dichotomy I mentioned earlier, it is not surprising that the sector world is topsy-turvy as well. Of course, all sectors were down last week, but Telecom did the best of the worst, along with Consumer Staples and Consumer Discretionary. This makes sense from the Staples viewpoint, but not a lot of sense from the Discretionary viewpoint.

Click here to see the Market Stats.

Materials were the worst last week, due to a significant strengthening of the dollar versus the euro. That drop put Materials at the top of our forward-looking rankings, but continuing strength in the dollar makes that an unlikely spot to hold. Energy, Financials, Healthcare and Information Technology look to me like the more probable places to find good bargains.

This is a good time to take profits on stocks that appear toppy or are overvalued by historical standards, if you have not done so already, and a good time to look for bargains in the favored sectors.  It is also a good time to be fully hedged.

Hedging, of course, is simply buying “insurance” for your portfolio in the form of shorting or buying puts on stocks that you think are going to go down.  Incidentally, Sabrient publishes a market letter which always stays hedged.  Today, while the market lost -1.29%, the Sabrient Investor’s (H)Edge Portfolio gained almost +1%. In fact the market’s lost -5.6% since last Monday while our portfolio has actually made a gain. (Click here for more information.)

4 Stock Ideas for This Market

After staying pretty conservative in recent weeks with undervalued growth picks, I decided to find some stocks that are bucking the downtrend and showing positive momentum. I started with Sabrient’s Small Cap Momentum preset search on MyStockFinder (http://MyStockFinder.com). Then I added Mid Caps and Buy-rated stocks to the search parameters. Here are 4 new stock ideas that look intriguing to me:

Cirrus Logic (Nasdaq: CRUS) – InfoTech
China Integrated Energy  (Nasdaq: CBEH) – Energy
Metropolitan Health Networks (AMEX: MDF) – Healthcare
Coinstar (Nasdaq: CSTR) – Consumer Discretionary

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.