David Brown
submits:
What does the market want, anyway? I know that's the name of
this newsletter, but it's not an easy question to answer in recent
months, and especially in the last couple of weeks.
The market roared out of the gates this morning (typical of
recent days), with the S&P 500 reaching a 5-month high, up
nearly 13 points, to within kissing distance of the "magic" 1200
mark. Presumably, the rise was on news that the G20 agreed to
refrain from devaluing their currencies for economic gain. But by
the end of today's session virtually all those gains were given up,
with the S&P 500 closing at 1185.
The market seems to be suffering from schizophrenia, seeing good
as bad and bad as good. For instance:
Last Week, IBM (
IBM
), Caterpillar (
CAT
), Eli Lilly (
LLY
) and Apple (
AAPL
) easily beat their earnings estimates and provided improved
guidance. Yet all those stocks were down for the week. Contrast
that with USG Corporation (
USG
), which missed estimates by nearly 10% for another dismal quarter,
prompting nearly all analysts following the company to lower their
2010 and 2011 earnings expectations.
Yet USG rose 8% today, which is higher than before they
announced earnings. Presumably, this was because the announcement
that existing home sales, while still gloomy, were 10% better than
last month's even gloomier number. Note that those are NOT NEW HOME
SALES, but rather existing home sales.
You see? Good is bad and bad is good.
Along the same delusional lines, the Finance Sector rose nearly
a full percent last week, despite the specter of improper
foreclosures and a number of other quite serious banking
problems.
We can place the blame for this dichotomy on macroeconomic
uncertainties. Are we in a double-dip recession or is economic
growth making progress? Is the dollar going to rise, as it did last
week, or fall, as it did today on the G20 news? Buffeted by
political, military and economic pronouncements, asset managers
leap first this way and then that, which manifests as schizophrenic
behavior in the markets.
So after the smoke cleared from the last week's very positive
corporate results and economic releases that were neutral at worst,
the market staggered to a mere +0.6% gain for the S&P 500.
Mid-cap value stocks led, up +0.67%, while small-cap growth stocks
trailed, down -0.2%, although that group is still the leading
cap-style for the last one-month and three-month periods.
This certainly was not a flight to safety, as Health Care,
Utilities and Energy were near the bottom of the sectors.
Interestingly, the sectors were led by high-flying Transports, up
+1.75% for the week, and the enigmatic Finance Sector, up +0.93%.
The fickle Capital Goods Sector came in third, up +0 .72% despite
the rise in the dollar.
Seemingly impervious to the perils of the financial industry,
the Finance Sector continues to top our forward-looking sector
model, because of the relatively low valuations of financial
stocks. Energy and Health Care are in slots two and three. At the
bottom of the forward-looking model are Consumer Services,
reflecting the cautious spending of consumers, and Transportation
and Capital Goods.
What we can take from all this? Just the fact that it is not at
all clear what the market wants. We have an environment of money
managers who are worried about the condition of the economy, the
upcoming mid-term elections, the value of the dollar, and renewed
military threats. Despite all of that, the volatility index (VIX),
surprisingly, has continued to stay relatively low, around 20,
although it was up a bit today.
But there is one solid tenet we can fall back on. The
overweening desire of money managers over the past 25 years has
been to find stable, growing companies properly valued, whose
earnings represent strong cash flow and whose accounting is clearly
conservative. In looking back at our charts over the past 10 years,
we find few months if any where these kinds of stocks were not
rewarded at least in line with the market, and generally, much
better.
This week offers a number of economic reports that might
influence the market, but if the market reacts the way it has these
past few weeks, the results could be good or bad, regardless of the
numbers. It will be good news if existing home sales are supported
by new home sales on Wednesday. We also have consumer confidence on
Tuesday, durable goods on Wednesday, initial jobless claims on
Thursday, the Chicago PMI on Friday, and most importantly, also on
Friday, the first estimate of the third quarter GDP.
4 Stock Ideas for this Market
This week, I started with the Undervalued Large Cap Growth
preset search on MyStockFinder.com (http://MyStockFinder.com), but
added several additional parameters. I included Large, Mid, and
Small caps, and upweighted Technicals, Insider Buying, and Analyst
Revisions. Here are four stock ideas that seem interesting:
SMART Modular Technologies (
SMOD
) - Technology
Gilead Sciences (
GILD
) - Healthcare
Axis Capital Holdings (
AXS
) - Finance
Trina Solar (
TSL
) - Energy
See also
Louisiana-Pacific CEO Discusses Q3 2010 Results -
Earnings Call Transcript
on seekingalpha.com