What the Market Wants: S&P 500 Sets New 4-Month High

The market is off to a great start this week, powered by last week's momentum and further buoyed by a lessening of fears about Europe's sovereign debt. All the major indices are above their 50-day and 200-day moving averages, with the S&P 500 finally breaking out of the 1120 resistance level, closing today at 1141, a new 4-month high. As an interesting historical aside, the 1120 resistance level was first encountered way back in April 1998.

Economic Reports. The market's solid performance last week was fueled by favorable reports from retail sales (+0.4% vs. the expected +0.3%) and initial jobless claims. While initial jobless claims were a disturbing 450,000, the number was still lower than the expected 455,000. More important than the weekly claims figure is the fact that the 4-week average was down sharply. The week's only negative economic surprise came on Friday from the University of Michigan's consumer sentiment reading of 66.6, rather than the expected 70.0.

This week, keep an eye out for these reports. On Tuesday we'll see housing starts for August and hear about any changes in short term interest rates from the FMOC meeting. On Thursday, we have the leading economic indicators (LEI), existing home sales, and the weekly initial jobless claims; and on Friday, durable goods orders and new home sales. 

Corporate America. Corporate reports are few and far between this late in the earnings season, but three of the four big ones reporting last week -- Oracle (ORCL), Research in Motion (RIMM), and Best Buy (BBY) -- were very good. The fourth biggie -- FedEx (FDX) -- not only missed its earnings but issued negative guidance as well. Considering FedEx's important role in our economy, this is not good news.

Corporate America is flush with cash, which seems to be burning a hole in the balance sheets, what with the hints and actual announcements -- from IBM (IBM) and Hewlett-Packard (HPQ) -- of acquisitions, and announcements of dividend increases from JP Morgan (JPM) and a number of others.  Even technology giant Cisco (CSCO) said it might share its cash with shareholders in the form of first-time-ever dividends. There were also share buyback announcements from MasterCard (MA), Gamestop Corp. (GME), and Texas Instruments (TXN).

Market stats. The markets chose to concentrate on the positive, with the S&P moving ahead 1.5% for the week. Small-cap growth led the charge, up +3.13%, with large-cap value bringing up the rear, but still up +0.89%. Believe it or not, the 4-week figures were solidly positive for all the cap/styles, with mid-cap growth leading, up +5.44%, and small-cap value trailing, at +2.8%.

To see the market stats, click here.

As for sectors, Technology led the positive week, as one might expect, up 4.1%, followed by Consumer Durables, up +2.4%. Only Energy was down, and only -0.06%. Utilities were near the negative line but still positive (+0.93%).

Our forward-looking sector model favors Technology by a fair margin over Basic Industries and Energy, with Consumer Durables and Consumer Services near the bottom.

4 Stock Ideas for this Market

This week, I used Sabrient's Small Wonders preset search on MyStockFinder (http://MyStockFinder.com) to identify some interesting Small and Micro Cap stocks. I also upweighted Technicals. Here are 4 stock ideas to consider:

Oplink Communications (Nasdaq: OPLK) – Technology
CPI Aerostructures (Amex: CVU) – Capital Goods
Wonder Auto Technology (Nasdaq: WATG) – Consumer Durables
Shoe Carnival (Nasdaq: SCVL) – Consumer Services

To the couple of readers who took exception to my selection of BMP Sunstone Corp (BJGP) as one of last week's stock ideas . . . I apologize that the stock has gone up only 7% since last Tuesday!  I  have consistently pointed out that these stock selections are short-term trading ideas based on our view of the market. When they are particularly short-term in nature, I state that I upweighted technicals (as I did in this week's selections). I would not do so for any purpose other than to emphasize that they're meant as candidates for those for seeking short-term gains. Every now and then, I will point out that a given stock idea may be a value idea, and in those cases, I am indeed talking about a longer term.

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.