What the Market Wants: Breaking Through 1000!
by David Brown, Chief Market Strategist, Sabrient Systems
David Brown
After an ISM reading that was better than expected and a construction spending result for June that was much better than expected, the market (i.e., the S&P500) has crossed the important 1000 resistance mark and in fact, closed the day at 1002. Recall that only three weeks ago, it was trying to stay above support at 880, so indeed, the past three weeks have been quite impressive.
Last week, Small-cap Value led once again, up 2.3%, and once again, Large-cap Growth trailed, up just 0.3%. The one and three month numbers are very handsome, with the one-month returns ranging from 7% to 11.4%, and all of the three-month returns well into double-digit territory.
If there is a problem, it is that we haven't really had such good news. The GDP, announced on Friday, was down only 1% for the second quarter, better than the expected 1.5%. But it was not up. Even worse, consumer spending was below what the economists had expected.
The Devil's in the Details. Clearly, the market's ebullience is coming from the nearly 60% of all companies handily beating earnings expectations, with less than 30% disappointing. However, as we pointed out last week, earnings improvement has relied heavily upon cost-cutting, and revenues in general have been less than expected and revenue guidance has been weak. But without revenue growth, continued earnings gains will get tougher to achieve, although the numbers to beat are from poor results.
So apparently, the market is betting the next quarter will see a positive GDP for the first time in four quarters. (This is the first time since the end of World War II that the GDP has contracted four consecutive quarters.)
This is one of those cases where the devil really is in the details. It would seem more likely than not that third quarter data will not maintain the momentum of the second quarter, but of course we can't be certain of that.
Valuations Rising. Valuations have risen considerably from their oversold levels back in March, with the S&P 500 now up a full 50% from its lows in early march. For the first time in more than a year, values in general cannot be judged as the bargains that I've been touting. Nonetheless there are still quite a number of companies still selling at very attractive prices. We just have to look a bit harder.
From a sector viewpoint, Financials, Consumer Discretionary and Telecom led the way last week, while Energy and Utilities sported losses for the week.
Looking Forward. Looking at the Sabrient forward sector rankings, Utilities, Energy, Healthcare and Telecomm seem to offer the best opportunities, with Materials, Technology and Financials at the bottom (primarily due to valuation issues). Incidentally, a weak dollar has fueled a major three-day rally in the CRB commodity index, up about 9% for the three days -- and among the best three days of the entire year. That condition is positive for the Materials and Energy sectors.
[Here are the Market Stats, which include Style & Cap Overview, Current Sector Performance, Best and Worst Industries, and Forward-looking Sector Rankings.]
Stocks to Consider in This Market. It is more important now than it's been in many months for the prudent investor to carefully seek properly valued stocks and avoid the urge to jump onto momentum plays.
This week, I ran a MyStockFinder search, using the GARP (Growth At Reasonable Price) preset search. I further limited it to Strong Buys, and up-weighted long-term technicals. Here are a variety of stock ideas that look intriguing from the top-ranked sectors Click the ticker to see SmartStock report on each stock):
- NRG Energy (NYSE: NRG) -- Utilities
- Breitburn Energy Partners (Nasdaq: BBEP) -- Energy
- Psychiatric Solutions (Nasdaq: PSYS) -- Healthcare
- Brasil Telecom S.A. (NYSE: BTM) -- Telecom
(Side note: There are a lot of very interesting stocks that popped up in my search, particularly in Energy & Healthcare. You should try the program yourself. Here's more info about MyStockFinder.)
Until next week
David Brown
Founder and Chief Market Strategist
Sabrient Systems, LLC