WHAT THE MARKET WANTS: Who Let the Bears Out?
Perhaps it was the new senator from Massachusetts who let the bears out, but I suppose it was a bit more than that. When the week began on Tuesday, after the Martin Luther King holiday, the bulls were grazing happily on GARP stocks, as contented as California cows. But then somebody opened that gate, and the bears roared through and the bulls ran for cover.
It wasn’t exactly a massacre, but it was far from pretty. Consider that the best style/cap, Small-cap Value, was down 4.3% and the worst, Large-cap Value, was down 5.2%. Obviously, all style/caps were ravaged, and the week’s carnage wiped out everything we had accomplished since Santa Claus came in December.
If Scott Brown didn’t actually open the gate, the uncertainty caused by his election had something to do with it, along with China threatening to tighten lending standards and the U.S. economic indicators that were released last week. Those were a mixed bag. The Philly Fed (15.2 vs. 18 expected) and the LEI (1.1 vs. 0.7 expected) were okay, but initial jobless claims were worse than expected (482K vs. 440K expected) and the PPI could be taken either way.
Corporate earnings were also mixed. There were a number of major disappointments -- Bank of America (BAC), Citigroup (C), Morgan Stanley (MS), TD Ameritrade (AMTD) and Schwab (SCHW) – as well as several major companies with excellent quarters – Wells Fargo (WFC), eBay (EBAY), Northern Trust (NTRS), and Parker Hannifin (PH). But the bottom line is that uncertainty reigned, and the bears loved it.
This morning, the landscape changed again. Even though existing home sales came in worse than expected, falling 16.7% in December, the "Manic Monday" effect seems to have come into play. Described by Graham Summers in his article "The Formula Behind This Market Rally, In Simple Terms," this theory says that Mondays -- or the first market day of the week – are generally bullish, spurred on by positive futures over the weekend and the Fed pumping up the money supply. Perhaps we experienced a Manic Monday today, because the S&P500 was up 0.46%. Also worth noting, after the close today (Monday), Apple (AAPL) reported incredible numbers, blowing away all estimates, and as I write this it is all over the board in afterhours trading.
Sectors. Before we look ahead, we should take a look back at last week, as painful as it is. All sectors were negative, with Materials the worst (-9%) just as projected by our SectorCast rankings. By the way, to see just how sweeping the damage was last week, the two worst industries were Metals & Mining, losing almost 11% for the week, and the totally unrelated Diversified Financial Services, down 10.7%.
Click here to see the Market Stats.
Looking ahead, Telecom leads the way, but surprisingly, Financials leaped from last place to a strong second in the current SectorCast. Despite the terrific spanking given the large banks by the President last week, the great majority of regional banks escaped his wrath and did quite well. Healthcare rounds out the top three forward-looking sectors, while Materials remains at the bottom along with Consumer Discretionary and Industrials.
It is difficult to know exactly where to turn this week, given this changing landscape. But despite today’s positive tone, I recommend extreme caution, sticking with conservatively priced stocks in the better sectors and appropriate hedges to protect the downside.
4 Stocks Ideas for this Market
This week, I used the Undervalue Large-Cap Growth preset search on MyStockFinder without any adjustments. Here are 4 stock ideas from the search that seem particularly intriguing:
Research In Motion (Nasdaq: RIMM) – Technology
AutoZone (NYSE: AZO) – Consumer Discretionary
Aflac (NYSE: AFL) – Financials
Novo-Nordisk (NYSE: NVO) – Healthcare
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 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 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.