WHAT THE MARKET WANTS: Pausing to Refresh or Retreat?

This week should be another interesting one, but it’s hard to say whether it can match the market’s behavior last week when it donned rose-colored glasses to view four days of mixed economic data.

Last week there were negative reports from the Treasury budget, trade balance, initial jobless claims, industrial production and consumer sentiment.  On the other hand, we had positive reports from retail sales, business inventories, building permits and housing starts.  Perhaps the most important report was the CPI, and it came in right on the nose, telling us we still do not have to fear inflation . . . at least not yet.

The rosy outlook was helped by last week’s corporate reports.  Granted, things got off to a slow start with a glum outlook from Alcoa (AA), but by far and away, most reports were much better than expected, including JP Morgan Chase (JPM), United Parcel Service (UPS), Yum! Brands (YUM), Bank of America (BAC), General Electric (GE), and Advanced Micro Devices (AMD) with its unexpectedly excellent report.   So far so good for the corporate side.

On Friday, however, the market’s rose-colored glasses cracked when the SEC announced its punitive actions against Goldman Sachs (GS).  Fearing not only for steep losses in GS but also for ramifications throughout the financial industry, the S&P 500 closed down Friday nearly -2%.

Not a Flight to Safety. For the week, the S&P was off about -0.5%, but it was clearly not a flight to safety, which precedes most sizable pullbacks.  Investors did not flock to large value stocks for safety because most large caps were down for the week, and the leading style/cap was Small-cap Growth, up +2% for the entire week. Mid-cap Growth also outperformed Mid-cap Value, which had a small loss for the week.

Click here to see the Market Stats.

Another sign that this pullback was not a flight to safety is that the usual safe havens -- Consumer Staples, Utilities, and Healthcare -- did not lead last week’s sector performance.  Instead, that honor went to Information Technology, not surprising given the wide number of very positive earnings surprises in that sector.  Healthcare and Financials were strong, as we had projected, but Consumer Discretionary and Industrials surprised to the positive side, also based on earnings announcements throughout the week.  Materials, Energy, Utilities, Telecom and Consumer Staples were the weakest performers.

The Week Ahead. It is difficult to predict where we go from here.  Of course we’ll keep our eyes on the lookout for any hint of the classic flight to safety, but as of this moment things still look okay. Today’s leading indicators report confirmed the upward direction of growth, with LEI up 1.4%, well above expectations.  However, the LEI isn’t so leading since most of that information is already in the market in other forms.  The next economic news will be Thursday when we get the weekly initial jobless claims, the core PPI, and existing home sales. Then on Friday we’ll have a fairly important durable goods report, along with new home sales.

Today (Monday), the market staged an impressive intraday comeback, led by the large caps. Could it be a small hint of an impending flight to safety?  After the bell, IBM disappointed on gross margin despite increased sales and earnings, and it is trading down afterhours.

Needless to say, we remain cautious and believe that investors should be looking for bargains and selling oversold stocks that have profits.  Sectors to favor, according to our 30-day-ahead sector forecast, are Financials, Energy, and Healthcare.


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4 Stock Ideas for This Market

This week, I started with a conservative Undervalued Large Cap Growth preset search on MyStockFinder (http://MyStockFinder.com), but I also included Mid Caps and slightly up-weighted Technicals, Insider Buying, and Analyst Upgrades. Here are four stock ideas that look pretty strong right now.
Symetra Financial Corp (NYSE: SYA) – Financials
Atwood Oceanics (NYSE: ATW) – Energy
Warner Chilcott PLC (Nasdaq: WCRX) – Healthcare
GameStop Corp. (NYSE: GME) – Consumer Discretionary

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.

david / Tag: AA, AMD, ATW, BAC, GE, GME, GS, IBM, JPM, sectors, SYA, UPS, WCRX, YUM /