What the Market Wants: The Schizophrenic Market
By David Brown, Chief Market Strategist, Sabrient Systems, LLC
David Brown
(Monday, September 21, 2009, 2:45 p.m. PST ) While I am not a psychiatrist, I am tempted to diagnose our current market as borderline schizophrenic because it has shown a tendency to go up on bad news but also often go down on good news.
To be sure, there was a fair amount of good news last week, with retail sales beating their numbers handily, the New York Manufacturing Index doing the same, and Chairman Bernanke declaring that the recession is very likely over. So as one might expect, the market was up for the week. However, by the time most of this good news was made public (on Thursday), the market went down.
Most of the large companies reporting last week -- e.g., FedEx (NYSE: FDX), Oracle (Nasdaq: ORCL), and Best Buy (NYSE: BBY) -- failed to meet consensus estimates. Most of the bad news came out late in the week, and on Friday, the market was -- you guessed it -- up.
Then this morning brought some more bad news. Lennar (NYSE: LEN) missed its earnings badly, and even missed its revenue estimates by a whopping 7%. Also, leading indicators were up 0.6%, versus an expected 0.7% and a revised July number of 0.9%.
Perhaps also related to a poor overseas market overnight, the market opened sharply down today (Monday), with all sectors down more than 1%, except Health Care. But as has been the case so often lately, the market fought off the ravages and retraced much of that loss by the close, with the S&P500 down -3.6 (much less than 1%).
Sector Performance: No Crystal Ball. It doesn't help us very much to turn to our sector data for help. Financials seemed to bear the biggest brunt of the bad news, with several more major bank failures and the President's speech threatening Wall Street over its exorbitant bonuses. With this backdrop of unpleasantness, our schizophrenic market considered Financials (up 4.2% for the week) the best buy of all the sectors.
Industrials, which legitimately had fairly good news for the week, was in second place, up 4%. At the bottom came Telecom (+0.6%) and Health Care (+1%).
Despite relatively little new news today, the sector map has flip-flopped. Health Care leads the pack, and Financials are near the bottom. Materials are down sharply today on decreasing prices of oil and other commodities. This is based partially on a surprising strengthening of the dollar, which flies directly in the face of a huge trade deficit, which we discussed last week, as well as various leaked agenda items from this week's G20 Conference in Pittsburgh, which in the aggregate appears negative for the dollar.
Dealing with a Schizo Market. So what's an investor do in such a schizophrenic market?
The answer is to play it safe by taking profits on anything that even hints of overvaluation and perhaps purchasing some protective puts in some of the overvalued areas. According to our forward-looking sector rankings, this includes Financials, Energy and Materials.
Of course, the prudent purchase of attractively priced stocks in favored sectors is a positive.
[Click here for the market stats.]
Stocks to Consider
One of last week’s picks, Corinthian Colleges (Nasdaq: COCO) got a big pop today along with the other education stocks like APOL, DV, ESI, STRA, and CECO. Of this group, all except CECO are rated Buy by the Sabrient Ratings Algorithm.
This week, I ran a MyStockFinder search (http://MyStockFinder.com) using the Undervalued Large-Cap Growth preset search, but also included mid-caps and up-weighted Long-Term Technicals and Insider Buying a bit. Here are some stock ideas that look intriguing:
Gilead Sciences (Nasdaq: GILD) – Healthcare
Raytheon (NYSE: RTN) – Industrials
Best Buy (NYSE: BBY) – Consumer Discretionary
NRG Energy (NYSE: NRG) – Utilities
Until next week,
David Brown
Chief Market Strategist
SABRIENT SYSTEMS, LLC
Leaders in Investment Research
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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.