What the Market Wants: What? Me Worry?
What? Me Worry?
by David Brown, Chief Market Strategist, Sabrient Systems
So, what does the market want?
Well, for one thing it wanted the European Union to bail out Greece, and that's what it got this morning. The S&P 500 responded by gapping up 13 points from Friday's close.
Then -- Bam! Bam! Bam! -- it was hit with three negative economic reports on top of the dismal picture painted by last week's reports, and so it tumbled back almost to where it ended on Friday.
Then it seemed to say "What? Me worry?" and roared ahead, with the three major indices -- the S&P 500, the Dow, and the Nasdaq -- all closing up more than +1%. The S&P 500 started the day about level with its 50-day moving average and ended up well above both its 50-day and 30-day MAs.
The S&P 500 Index
Granted, the bailout of Greece strengthened the euro, which weakened the dollar and aided the market's rally, as did the strong increase in oil prices. For those keeping track, oil was up about 3% last week, while the dollar was down about 2%.
Just to prove further that the market is fearless, the VIX was down about 2% last week, although it was up a bit today.
So what was all the bad news the market ignored?
Today it ignored bad housing numbers, worsening business conditions, and growing pessimism among consumers. The S&P Case-Shiller report confirmed last week's bad housing numbers, leading many to say that the housing market indeed faces a double-dip recession. Worse was the Chicago PMI report on the business climate. While it held above the magic "50 mark," it fell to 56.6 from last month's 67.6 and the expected 63; and the consumer confidence index dropped to 60.8 versus last month's 66 and the expected 66.5.
The market accepted all this with equanimity, just as it did last week when the pending home sales index fell 11 points, eclipsing the rise in new home sales. Durable goods added to the week's bad news, falling to -3.6% from last month's +4.4% (-3.3% was expected). Even excluding transportation, durable goods was off -1.5%. Inital jobless claims messed with us again last week, coming in at 424K vs. an expected 400K and the previous week's 414K.
Our second look at the 1st quarter GDP remained at 1.8%, and personal income was unchanged. Only the Reuters/University of Michigan's Consumer Sentiment Index showed an improvement, coming in at 74.3 vs. expected 72.5 and the previous reading of 72.4.
To all of that the market responded with a big ho-hum, with large-caps (the Russell 1000 Index) ending the week exactly where it ended the week before.
Market Stats. Large-cap Value was off -0.03%, but small caps rallied with an almost +1% gain for the week.
Sectors favored by the market last week included Basic Industries (+2.47%) and Energy (+1.99%), just as our forward-looking SectorCast had expected. At the bottom of the rankings were Technology (-0.36%), Capital Goods (-0.37), and Transportation (-0.87%). The only real surprise was Health Care, coming in 5th from bottom (-0.17%) when we expected it to be in the top three.
In our forward-looking SectorCast model, there is a gap of 45 points between the #1 ranked sector, Energy, with a score of 68, and the sector ranked dead last, Consumer Services, with a score of 23. In second place is Basic Industries (54), and in the middle, scoring in the 40's, are Public Utilities, Health Care, Technology, Consumer Non-durables, Capital Goods, and Transportation. Consumer Durables and Finance both scored in the mid-30’s.
While the overall market rallied back over its 50-day and 30-day MAs today, the most robust sectors were Technology, Energy, and Health Care. Not invited to the party were Capital Goods, Utilities, and Consumer Non-durables, all representing the classic flight-to-safety, which this obviously was not.
Looking ahead. Possible market-moving economic reports coming up are construction spending, the ISM manufacturing index, and auto and truck sales on Wednesday; initial jobless claims will get a chance to beat on us again on Thursday, along with factory orders and productivity; and on Friday we'll get the ISM non-manufacturing index and the May Employment Situation report which will give us the official unemployment rate, which last month was 9%. The expected number is 8.9%.
4 Stock Ideas for this Market
This week, I started with the High Growth preset search in MyStockFinder (http://MyStockFinder.com). I then included Buys (in addition to Strong Buys) and increased the weightings in Long-Term Technicals and Insider Buying. Here are four stock ideas from some of the higher-ranked sectors that look intriguing:
CNOOC Ltd. (CEO) – Energy
Kronos Worldwide (KRO) – Basic Industries
Transcend Services (TRCR) – Healthcare
Veeco Instruments (VECO) – Technology
Until next week,
David Brown
Chief Market Strategist
Sabrient Systems, LLC
Leaders in Investment Research
http://www.sabrient.com
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.