What the Market Wants: Up, Up and Away?
by David Brown, Chief Market Strategist, Sabrient Systems
David Brown
We had our fourth consecutive week of market gains last week, as the market continues its impressive march upwards, supported by an underlying bid that simply will not allow any meaningful technical retracement. Small-cap Value led the way yet again, up a robust +4.7%, with Small-cap Growth trailing at +0.9%, along with Mid-cap and Large-cap Growth, both up 1.0%.
For the past three months now, overall gains have been inversely proportional to size, with a clear slant toward value.
All style-caps are now in double digits for one and three months, and even six months. The Style/Cap table below shows how consistent the market has been over this period.
I should probably point out that the market has spent eight consecutive days in a very tight range around the 1000 level on the S&P500. Normally, in a consolidation pattern like this, breakouts from that pattern are important as to near-term direction.
From a sector viewpoint, AIG earned its first quarterly profit since 2007, and its more than 100% gain led the entire Financial Sector to a surprising 7.5% gain for the week. Consumer Staples and Health Care were the only negative sectors, and negative only by a tad.
The Waning Days of Summer. From here, it is a murky view into the waning days of summer. On one hand, there were a number of positive economic releases last week, including ISM's seventh consecutive increase. Construction spending was up 0.3%, even though it had been expected to fall 0.5%, and the data from the National Association of Realtors showed that pending home sales rose 3.6% in June. The positive economic news culminated with the best jobs report in months, showing unemployment easing back to 9.4% in July from June's 9.5%.
Offsetting all that positive news is the fact that retailers turned in one of their worst reports yet, with over half of the retailers reporting last week showing worse-than-expected sales. Large companies such as Cisco (Nasdaq: CSCO) and Proctor & Gamble (NYSE: PG) continued the trend of reporting better-than-expected earnings on much-less-than-expected revenues, a trend that, as we noted last week, will not in the long run lead to a better economy. And despite the improved jobs report, employees who have lost their jobs are out of work longer than they have been since 1948, averaging 25 weeks of unemployment.
It could very well be that the positive side of the economic news and the improved corporate earnings will lead to the eventual recovery of the economy, but that is far from certain.
Looking Ahead. Looking ahead, our Sabrient sector scores still favor Energy, Utilities, and Health Care, along with Telecom, while hinting that Technology, Materials and Financials are at the bottom due to valuation issues. It is important to point out, however, that although Financials as a sector are at the bottom of the rankings, stocks from the Insurance Industry within that sector are scoring near the top in our forward-looking ranks and showing excellent valuations.
The prudent investor will continue to look for value-oriented stocks among the medium to small-cap sizes.
[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. This week, given the recent strength in small caps, I ran a MyStockFinder search, using the GARP (Growth At Reasonable Price) preset search, but limited it to small-caps & micro-caps only.
Here are a variety of stock ideas that look intriguing from the top-ranked sectors, plus the highly ranked Insurance Industry: (Click the ticker to see (SmartStock report on each stock):
- Legacy Reserves (Nasdaq: LGCY) -- Energy (this is high yielder!)
- Emergency Medical Services (NYSE: EMS) -- Healthcare
- AboveNet (Nasdaq: ABVT) -- Telecom
- Safety Insurance Group (Nasdaq: SAFT) -- Financials (Insurance)
Until next week
David Brown
Founder and Chief Market Strategist
Sabrient Systems, LLC