What the Market Wants: Where Oh Where is this Market Headed?

by David Brown, Chief  Market Strategist

David Brown

The market doesn't seem to know which way it wants to go. Last week was literally the mirror image of the previous week. The best style/cap two weeks ago was Small-cap Value; last week it was the worst (-3.4%). The worst style/cap two weeks ago was Large-cap Growth; this week it was the best (-1.9%).

Sectors were no different, with last week's three winners -- Financials, Industrials and Materials --turning up as this week's big three losers, led by Materials, down -4.7%.  Last week's losers -- Consumer Staples, Health Care and Telecom -- were this week's best performers, led by Health Care, down only 1%. In all my years of participating in the market, I don't recall ever seeing such a complete turnabout in a single week.  

Only our forward-looking sectors rankings didn't join in. They remain very much as last week, with Utilities, Energy and Health Care on top and Technology, Financials and Materials at the bottom.

Merger Talk Boosts Market. Thursday and Friday were ugly market days, but inexplicably the market took off today, ostensibly on M&A talks from Abbott Laboratories (NYSE: ABT) courting Belgian chemicals maker Solvay and from Xerox Corp. (NYSE: XRX) agreeing to buy Affiliated Computer Services (NYSE: ACS).

The S&P 500 ended the day up 18 points (+1.8%) despite the fact that last week's economic indicators were average, at best, with LEI and durable goods both below expectations and jobs data and FOMC comments mildly positive.

While it is tempting to stay on the sidelines among such volatility, that strategy has not been a reasonable one throughout 2009, as many investors who sat on their cash can attest. The trick is to simply watch the valuations . . . don’t pay too much! Compare a company's valuation against its own history and also against its industry. Shop for bargains, and hedge with puts against overvalued niches.

Absolute Returns, Absolutely! At Sabrient, we specialize in absolute return models, which protect us from most market vagaries and allow us to generate alpha on both long and short components of our portfolios.  We look for long positions among the strongest companies with the most favorable valuation and seek short positions among the weakest companies with high valuations. The result is that Sabrient is normally well-positioned for markets such as this one

[Click here for the market stats.]

Stocks to Consider. This week, I ran a MyStockFinder search (http://MyStockFinder.com) using the High Growth preset search. Here are some stock ideas that look tempting:

Illumina (Nasdaq: ILMN) – Healthcare (Sabrient Growth Score = 100)
CNinsure (Nasdaq: CISG) – Financials-Insurance (Sabrient Growth Score = 97)
Vimpel Communications (NYSE: VIP) – Telecom (Sabrient Growth Score = 97)
Peabody Energy Corporation (NYSE: BTU) – Energy (Sabrient Growth Score = 95)

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 “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.