What the Market Wants: Tipping Point Deja Vu

Tipping Point Deja Vu

by David Brown, Chief Market Strategist, Sabrient Systems

Seems like we were here just last week, waiting for the market break out of its “Channel of Gloom” or tip further into the Channel’s murky depths.  In fact, we came close to tipping to the positive side last week but were held down by a poor consumer sentiment report on Friday and negative earnings from Google (GOOG), plus a double negative whammy from Bank of America (BAC).  Not only did BAC announce negative revenues, it let loose with a scary warning about the negative impact of write-offs from the new financial regulations. So on Friday, the S&P 500 tipped further into the three-month Channel of Gloom.

Today  the market drifted near the unchanged mark most of the day, but S&P 500 managed to close up +0.6%, well below the top of the Channel and still submerged below its 50-day and 200-day moving averages.  In the after-market, following IBM’s disappointing revenues report, the market gave it all back, and then some.

Market Stats. The market stats show a classic flight to safety.  In general, the larger the cap, the better it did.  The best cap/style was large-cap growth, down -1.0%; the worst was small-cap value, down more than -3%.  Overall, growth out-performed value in all 3 caps.

Sector performance reflected the flight to safety, with Consumer Staples, Healthcare and Utilities taking three of the top four positions.  The exception was Information Technology, which came in second as predicted by our system. Worries about a second dip recession pushed Materials all the way to the bottom.

Click here to see the Market Stats.

Our forward looking model continues to place Materials in a leadership slot, due to the strong corporate earnings reports that indicate recovery is on its way.  Our model sees Information Technology and Energy in second and third place.

The Week Ahead. The market is tipping toward the negative, with the nearest strong support for the S&P 500 at 1040, so it will take a solid week of good news to steer us away from the Channel of Gloom.

Can the housing industry do it?  Housing indicators will dominate this week’s economic news, but the first one out of the chute doesn’t bode well.  Today, the National Association of Home Builders reported the weakest conditions since April 2009, with the July housing market index falling to 14, which is 8 points from its recovery high of 22 in May.  Tuesday, we’ll see housing starts and new building permits, and on Friday, existing home sales. If all these reports are poor to neutral, Thursday’s initial jobless claims and Friday’s leading indicators (LEI) report won’t matter much.

The more likely savior will be the corporate earnings reports due out this week. There are at least 70 significant ones.  IBM (IBM)  and Texas Instruments (TXN) reported today (IBM disappointed; TXN did not).  Johnson & Johnson (JNJ) and Goldman Sachs (GS) report on Tuesday, Coca Cola (KO) and Morgan Stanley (MS) on Wednesday, and AT&T (T) and United Parcel (UPS) on Thursday.

As long as we remain in this Channel of Gloom, I urge exceptional prudence.  Take your profits in stocks that are pushing overvaluation, and search for bargains and hedges.  (For a look at a hedged portfolio, check out the Sabrient Investor’s (H)Edge Portfolio.)

4 Stock Ideas for This Market

This week, I started with Sabrient’s GARP (Growth at a Reasonable Price) preset search on MyStockFinder (http://MyStockFinder.com). Then, I adjusted the parameters by up-weighting Technicals. Here are 4 new stock ideas that look particularly intriguing to me:

NewMarket Corp (NYSE: NEU) – Materials
WellPoint Inc. (NYSE: WLP) - Healthcare
Credicorp Ltd (NYSE: BAP) – Financials
Lincoln Educational Services (Nasdaq: LINC) – Consumer Discretionary

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC
Leaders in Investment Research
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.

david / Tag: BAC, BAP, GOOG, GS, IBM, JNJ, KO, LINC, MS, NEU, sectors, T, TXN, UPS, WLP /