What the Market Wants: Tipping Point?

One hesitates to put too much emphasis on any given week when discussing market trends, but this week could be the tipping point for the current market. Despite the S&P 500's 50-point gain last week on virtually no news at all, the fact remains that it is still more than 12% below the April 23rd high of 1217 and still has not broken out of the downward channel that began on April 26.

The bottom of the channel was reached about two weeks ago at 1010, and the top is now about 1080, as you can see from the chart below. Coincidentally, the top is close to where the 50-day and 200-day moving averages currently reside.

The S&P 500 blithely ignored the Dark Cross myth last week when its 50-day MA crossed below its 200-day MA. That is usually an ominous sign according to adherents, but the index just kept on going up. Now it is poised either to continue its downtrend or break upward through the channel and its 50-day and 200-day moving averages. Which way it tips will depend on the negative or positive power generated by the market-moving reports from the first key week of the Q2 earnings season and the plethora of economic indicators due out this week.

Today we have after-market earnings reports from Alcoa (AA) and CSX Corporation (CSX). Tomorrow, we have trade balance data, treasury budget data, and important announcements from Intel Systems (INTC) and Novellus Systems (NVLS), among others. It doesn't get easier on Wednesday as retail sales, business inventories and import/export pricing are announced, followed by Thursday's weekly initial jobless claims, PPI, industrial production, and capacity utilization. Friday tops off the economic data with CPI and the University of Michigan Consumer Sentiment Report. Mixed in with these economic reports are more Q2 earnings announcements from financial behemoths Bank of America (BAC) and JP Morgan (JPM), technology giants Advanced Micro Devices (AMD) and Google (GOOG), and conglomerate General Electric (GE).

It could be that the market will continue its dull summer behavior, despite all these announcements, but I think it is more likely that they tip it one way or the other -- either accelerating the downward decline of the S&P 500 or, if sufficiently positive, providing the impetus for the index to break out of its downtrend and push above its long–term moving averages.

Two additional events could affect the tipping point. This is options expiration week, always good for a little volatility, and China's announcement over the weekend of its strong economic growth (both exports and imports) could have a positive effect on our own economy. We should note, however, that Chinese exports led its imports, which takes a little bit of the shine off this bright new penny, renewing calls for a free-floating yuan. Forecasters are predicting an even larger trade surplus for the second half of 2010.

Market Stats. All cap/styles moved up last week, tightly grouped between +5.1% (Large-cap Value) and +4.0% (Small-cap Growth).

The sectors gave us a couple of surprises last week, with Utilities leading the way (+8.3%) and Healthcare in last place (+3.3%). The rest were pretty much as expected, with Financials (+7.1%), Materials (+7.0%), Energy (+6.4%) and Technology (+5.3%) in the top half of the group, and Consumer Discretionary (+3.6%), Telecom (+3.9%), Consumer Staples (+4.0%) and Industrials (+4.9%) rounding out the bottom half.

Click here to see the Market Stats.

Our forward-looking SectorCast still favors Materials, Technology and Energy. We expect Healthcare and Financials to be somewhere in the middle, with Consumer Staples and Consumer Discretionary at the bottom.

4 Stock Ideas for This Market

This week, I am staying on the conservative path by starting with Sabrient's Undervalued Large Cap Growth preset search on MyStockFinder (http://MyStockFinder.com), but I also included Mid Caps. Also, I adjusted the parameters by up-weighting Technicals and Insider Buying. Here are 4 new stock ideas from the top-ranked sectors that look intriguing:

Compania de Minas Buenaventura (NYSE: BVN) – Materials
Interdigital Inc. (Nasdaq: IDCC) – InfoTech
Transocean Ltd. (NYSE: RIG) – Energy
Medicis Pharmaceutical (NYSE: MRX) – Healthcare

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.

What the Market Wants
david / Tag: AA, AMD, BAC, BVN, CSX, GE, GOOG, IDCC, INTC, JPM, MRX, NVLS, RIG, sectors /