What the Market Wants: Troublesome Economy Trumps Positive Corporate Mood

Nothing seems to be strong enough to lift the market out of its doldrums.  Not the shiny corporate earnings announcements from Wal-Mart (WMT) and Home Depot (HD).  Not the exciting merger talks between BHP Billiton (BHP) & Potash (POT) or between Intel (INTC) & McAfee (MFE). Not the slightly improved global economic picture. The market continues to focus on the troublesome domestic economy, which last week produced some paltry numbers and some truly miserable ones.

The week started with weak signals from the Empire State Manufacturing Index and ended with initial jobless claims hitting 500,000 on Thursday for first time in nine months and the Philly Fed’s atrocious turnabout from a positive +7.5 to a negative -7.7.

The bottom line is, despite better-than-expected earnings and optimistic guidance from the corporate corner, the market is stuck on the gloomy economic picture, which includes the worrisome fact that banks simply aren’t lending to small businesses or anyone else.

What will it take to get the market unstuck and moving forward again?  Tangible evidence that we’re not headed into a follow-up recession.

We may or may not get that evidence this week. Tomorrow we’ll see the existing home sales for July; Wednesday, we’ll see July’s durable goods orders; Thursday will show us the weekly initial jobless claims; and on Friday we’ll get the second look at second quarter GDP.

Market stats. Last week’s market stats are about as ho-hum as any we’ve seen in recent weeks.  Small-cap growth was the best cap-style, up +0.58%, while large-cap value was the worst, falling one full percent (-1.03%).  Although the whole mid-cap index and the whole small-cap index each gained +0.21%, the whole large cap index fell -0.56%. Absolutely nothing to get excited about.

Click here to see the market stats.

From a sector viewpoint, the Materials Sector led at +1.5%.  Information Technology also did well, as our forward looking sector model had projected, gaining almost a full percent (+0.99%).  And we can take some encouragement from the Consumer Discretionary Sector being up +0.56%.   All other sectors were down, with the worst being Energy (-1.78%) and the troubled Financial Sector (-1.01%).

Our forward looking model continues to favor Financials, although this is unlikely to come to pass as long as the new Federal regulations of the banking industry remain unclear, but Information Technology looks solid as No. 2.  Sitting at the bottom of the group are Consumer Discretionary and Consumer Staples; their constituent stocks are unlikely to produce much success on the long side.

It’s clear that we need to batten down the hatches, look for the few bargains that are out there, sell off fully valued companies, and hedge where possible.  If you’re reluctant to sell your fully valued positions, this is a good time to enhance your yield with options (selling calls on your long positions).  By the Way, Scott Martindale's recent blog post on "Hedging a Stock Portfolio" might interest you: http://sabrient.com/blog/?p=1808.

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 excluded Micro Caps, and upweighted Technicals. Here are 4 intriguing stock ideas from the top-ranked sectors:

Aviva PLC ADR (NYSE: AV) – Financials
JinkoSolar Holding Co ADR (NYSE: JKS) – InfoTech
Owens Corning (NYSE: OC) – Industrials
Alliance Resource Partners (Nasdaq: ARLP) – 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.

david / Tag: ARLP, AV, GHP, HD, INTC, JKS, MFE, OC, POT, sectors, WMT /