What the Market Wants: Dream Meets Reality
by David Brown, Chief Market Strategist, Sabrient Systems
David Brown
We've spent our warm summer afternoons daydreaming about the bullish market which has moved inexorably higher since early July. We dreamed the world would come out of its recession smoothly, that joblessness would dissipate and everybody would earn more than expected, and we'd all live happily ever after.
Then reality hit, with a spate of not-so-good news last week.
There was an increase in new jobless claims, which had been going the other direction. Retail stores reported very unpleasant sales news, and in general, news about the welfare and spirit of the consumer was poor indeed, with credit card defaults worsening in July along with a decrease in consumer confidence. All of which put an end to the market's four-week winning streak.
Small-cap Value, which had done the best two weeks ago, did the worst last week, losing 1.6%, and Large-cap Growth, almost the weakest performer two weeks ago, turned in the best results this past week in a clear flight toward safety by the investing public.
One Bright Spot. Today (Monday, August 17), the news continues to be not so good; one example being the weaker-than-expected GDP report from Japan. The one bright spot in today's news is the New York Manufacturing Index, which showed its first positive reading since April 2008 and its best reading since November 2007. But so far, that gleam of light has done little to dissuade the bears from wreaking havoc, with the Nasdaq down 54 points today and the S&P down well over 2.4%.
To be sure, one down week doesn't necessarily mean the end of the rally, but the break toward the downside was significant. Recall my comment last week, that the next major move, whatever direction, would be significant because it would be coming on the heels of eleven days of consolidation. There is some mild support for the S&P500 in the region of 980, where we are at this time, but major support is at 940, which we thought we had left behind in early July.
Sector Performance. From a sector viewpoint, there were four positive sectors on the weighted returns, led by Consumer Staples, up 0.5%, along with Health Care, Utilities and Technology. Health Care continues to do well today, as compromises seem to be forthcoming on the Obama health care plan. The worst sector was Consumer Discretionary, which along with Materials and Industrials, are all down more than 1%.
On a forward basis, the same four sectors that lead the current rankings -- Utilities, Health Care, Energy and Consumer Staples -- coincidentally continue to look the most favorable from Sabrient's forward-looking scores. Financials, Materials and Technology appear to have the worst forward outlook, based primarily on valuation issues.
This would be a good time for the prudent investor to take profits on issues that have reached full valuation and look for bargains, especially if the market falls further.
[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, I ran a MyStockFinder search using the Under-valued Large Cap Growth 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, Inc. (NYSE: NRG) -- Utilities
* Diamond Offshore Drilling, Inc. (NYSE: DO) -- Energy
* UnitedHealth Group Incorporated (NYSE: UNH) -- Healthcare
Until next week,
David Brown
Founder and Chief Market Strategist
Sabrient Systems, LLC