What the Market Wants: Fed Walks Fine Line Between the Short-Term & Long-Term

Fed Walks Fine Line Between the Short-Term & Long-Term

by David Brown, Chief Market Strategist, Sabrient Systems

This week begins the heaviest onslaught of earnings announcements, and their outcome will be the biggest driver of this week's market. Today, better-than-expected results from Citigroup (C) lifted financial stocks and boosted the whole market, with the S&P 500 (SPX) closing the day at 1185. Apple (AAPL) and IBM (IBM) announced their results after market close today, and both beat estimates -- Apple clobbered theirs -- and both provided positive guidance. But both traded off in the aftermarket, with IBM down about 4% and AAPL down more than 6%. Go figure! Not a good sign of market health.

In the background is the continuing buzz of M&A activity, with the loudest buzz last week created by Pfizer's (PFE) rich acquisition of King Pharmaceuticals (KG) at a 40% premium.

The market seems to be paying more attention to such M&A activity than to pronouncements by the Fed. The Fed clearly signaled in its FOMC minutes last week that it would embark upon what is known as QE2 –- quantitative easing for the second time. This has the danger in the long run of beginning an inflationary cycle and rising interest rates, although Chairman Bernanke emphasized that the short-term gain justified the long-term risk. It's a fine line he's walking. The market reacted with a big yawn and continued to crawl ahead, with the S&P 500 gaining less than one percent for the week. 

There is a dearth of economic reports this week, and those on tap will take a back seat to earnings announcements. Today's industrial production numbers were weaker than expected and had absolutely no effect on the market. Tomorrow we'll have housing starts and building permits, with the weekly initial jobless claims on Thursday and LEI on Friday.

Market stats. Small-cap growth led the cap-styles last week with a gain of +1.67%, and is now up +8.7% for the past month and +12.7% for the last quarter. Large-cap value turned in the worst performance of the week, up only +0.1% but still up.

The beginning of earnings season had its biggest impact last week in the Technology Sector (up +3.3%), with Google (GOOG) blowing away all numbers and Intel (INTC) turning in a very solid quarter, along with positive forward guidance. Consumer Non-Durables came in second, up +1.8%, followed by Basic Industries, up a solid +1.56%. The only real laggard was Finance (down -0.95%), with banks slipping on worries that improprieties in mortgage foreclosure processes will compromise previously sold pools of mortgages. Capital Goods, the next lowest sector, managed to turn positive (+0.4%), as the dollar finally strengthened on Friday after a nasty fall the first four days of the week. The VIX was nearly unchanged. Oil prices were up sharply.

Our forward-looking sector model is somewhat bleak on all sectors, because for the first time in several months the outlook doesn't include sharply rising earnings. Finance now leads the pack with Basic Industries and Technology very close behind. At the bottom are Consumer Services, Transportation and Capital Goods.

4 Stock Ideas for This Market

This week, I started with Sabrient's GARP (Growth at a Reasonable Price) preset search on MyStockFinder (http://MyStockFinder.com). I also slightly upweighted technicals and limited picks to the top 7 sectors as ranked by SectorCast. Here are 4 new stock ideas that I found interesting:

AFLAC, Inc. (NYSE: AFL) – Financials
Lubrizol Corp. (NYSE: LZ) – Basic Industries
Myriad Genetics (Nasdaq: MYGN) – Healthcare
TPC Group (Nasdaq: TPCG) – Energy

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC
Leaders in Investment Research
and  http://Twitter.com/ScottMartindale

Full disclosure:  The author does not personally 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 their personal financial 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.