What the Market Wants: Well, What's It Gonna Be . . . Trick or Treat?

Volatility returned to the marketplace with a vengeance last week, and we should be prepared for more of the same this week. On Wednesday, Thursday, and Friday the market moved 2% or more – in opposite directions each day.  The S&P 500 was down 2% on Wednesday, up more than 2% on Thursday, and down again on Friday nearly 3%. Today (Monday) produced a bull-bear battle for where the market will go next. At this juncture, caution is in order.

Once again, the market was hardest on small caps, with Small-cap Value down 6.2% for the week. But no one was spared, with Large-cap Growth turning in the best, albeit negative, performance (-3.8%).  It seemed at times that the dollar was spawning market behavior, as market direction frequently was almost directly opposite the direction of the dollar – a weak dollar spawned the good day; a strong dollar spawned the bad days (a weak dollar, of course, spurs exports and limits imports, and a strong dollar does the opposite).

Another factor in the wild week was a very surprising and strong GDP figure for the most recent quarter, which was our first positive quarter in over a year.  It moved from -0.7% in Q2 to +3.5% for Q3.  To be sure, this was stimulated in part (or perhaps more than in part) by the cash-for-clunkers program and new home purchase tax credits.  The GDP figure was the stimulus behind the great Thursday market because it offset weakened consumer confidence reported earlier in the week.

Today, the volatility of last week seems to have been compressed into a single day.  The market opened strongly on positive ISM data and then fell to profit-taking and moved solidly into negative territory, with the S&P 500 breaking its 1040 support level. But in the end it closed strongly after all, leaving a slightly positive bias but mostly indecision (and fear) among traders.

Sectors. The strong sectors last week were Consumer Staples, Healthcare and Telecom, while the weakest sectors were Consumer Discretionary, Industrials and Financials. I will point out immodestly that these rankings were predicted almost exactly last week by the Sabrient SectorCast, our new forward-looking ranking system.

Click here to see the Market Stats.

It would be sheer folly to speculate on where the market heads now. Clearly, quarterly earnings were a positive factor, with 80% of reporting companies beating earnings estimates -- and frequently even beating revenues estimates.  Most economic indicators, other than jobless claims, continue to show improvement, but negatives abound.  Unemployment is nearly 10%; our financial system underpinnings continue to be weak, as evidenced by the rash of banks closing last Friday, one of the highest numbers for the entire year; and the market has broken support.

All this leads to a quandary as to future direction.  Fortunately, at Sabrient, we try not to worry too much about market direction.  With our absolute return strategy, we concentrate on purchasing strong alpha stocks somewhat independent of the market while simultaneously hedging, using weak stocks, options or ETFs.

What Does this Market Want? Our forward-looking sector rankings are little changed at the top and bottom, so I would recommend that you stick to larger cap issues in the top three forward looking sectors (Telecom, Healthcare and Consumer Staples).  Beyond sector preferences, the market has a proclivity at this time for stocks that have strong value, positive momentum or are good candidates for turnaround. Revenue growth is preferred to making money only by cutting costs.

4 Stocks Ideas for this Market. This week, I ran a MyStockFinder search (http://MyStockFinder.com) using the Undervalued Large-Cap Growth preset search. I slightly up-weighted Technicals and limited the sectors to the three identified above. Here are four stock ideas that look intriguing:

AmerisourceBergen (NYSE: ABC) – Healthcare
Wellpoint (NYSE: WLP) - Healthcare
Rogers Communications (NYSE: RCI) – Telecom
Archer Daniels Midland (NYSE: ADM) – Consumer Staples

Until next week,

David Brown
Chief Market Strategist

SABRIENT SYSTEMS, LLC
Leaders in Investment Research
Follow us on Twitter: http://Twitter.com/ScottMartindale

Full disclosure:  Neither Sabrient, David Brown nor Scott Martindale holds any of the stocks mentioned in this week’s “4 Stocks to Consider.”

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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.