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What the Market Wants: Crazy is as Crazy Does

Posted on the 09 March 2011 by Phil's Stock World @philstockworld

What the Market Wants:  Crazy is as Crazy DoesWhat a week!  The market was at its craziest this past week, with flat days, booming days, and a couple of truly nasty days. The crazy part was that you couldn’t predict which way the market might go, based on normal market information.  On Thursday the market rallied on an excellent initial jobless claims report and then Friday, when that number was confirmed by the lowest unemployment number in many months (8.9%) and accompanied by a host of other good economic data, the market plunged, giving back more than half the previous day’s gain.  Just to make sure we knew it was serious, it gave back the rest of the gain yesterday.

Today (Tuesday, March 8), the market did an about-face, staging a rally for reasons that aren’t completely clear. The S&P 500 gained +0.9%, while the Dow gained a full percent.

Fear = Volatility.  Much of the market’s volatility is caused, of course, by the continued turmoil in Libya and the resulting sharp rise in oil prices. (Oil reached $108 a barrel at one point late last week.)  For example, the market plunged on Friday after hearing analysts’ forecasts that rapidly rising oil prices would stifle our economic recovery, especially in technology.  Today, after OPEC announced it would try to make up for the oil shortage from Libya, oil prices pulled back and the market rallied with gusto.

Who knows what will happen this week to move the market one way or the other, but clearly, it is fearful and its behavior borders on schizophrenia. 

The market’s fear was reflected in the VIX index.  For several months, the VIX has hovered at a subdued level of about 15, but twice in the past few days new-found fears have pushed it over 20. At today’s close, the VIX sat right at 20. By historical standards, this is not exceptionally high, but it is high when you focus on just the past several years.

The VXX — a longer-term version of the VIX — has been rising steadily over the past 30 days and it rose again today, settling in at 31.

But, when you think about it, why wouldn’t fear indexes rise in an environment like today’s?  Indeed, the VIX and the VXX actually seem muted, considering the global turmoil.

What does THIS market want? In a market like this, the burning question is: What DOES the market want?  I can only tell you that last week it wanted Small-cap Growth stocks, as it has so often in the past 12 months. That cap/style gained +0.83% for the week, while the entire S&P 500 gained about +0.1%. The only negative cap/style was Small-cap Value, which was off by only a tiny fraction, at -0.03%.

Click here to see the market stats.

From a sector viewpoint, the market clearly favored Health Care, up an impressive +2.34%, while shunning Finance, which was down nearly one full percent. (In a complete turnaround, Finance was the big winner among sectors today, along with Transportation).  Other favorites last week were Basic Industries, Energy and Public Utilities, while other laggards included Transportation and Consumer Durables.

Looking ahead, the Sabrient SectorCast favors Basic Industries, Finance, Capital Goods, Technology, and Health Care.  But the outlook for Consumer Durables, Transportation and Consumer Services is quite negative.

SIDEBAR:   A Word About Sector Stats & ADRs

 

I’d like to share a bit of information with you about our forward-looking SectorCast, because our sector data was the reason we postponed publishing the newsletter for one day this week.

Our sector model is constructed of the underlying stocks within each Thomson Reuters sector. Unlike the S&P sectors, which we formerly used, the Thomson Reuters sectors include ADRs (American Depository Receipts).  ADRs are generally not included in the S&P 500, the Dow or the Nasdaq, as they represent shares of non-U.S. companies that are traded on the NYSE.

The point is, ADRs can skew the performance of our sector stats to the point that our stats don’t track the performance of some of the major indexes.  On days when the performance of ADRs (most of which represent very large-cap companies) diverge significantly from domestic stocks, we see aberrations in our Thomson Reuters-based sector stats.

Indeed, that happened last week.

Last week, our Thomson Reuters-based sectors, which include ADRs, diverged significantly with SPDR-based sectors that use the ADR-less S&P configurations.  Undoubtedly, the weakening dollar was partly to blame for the divergence, but the bigger culprit was probably the sharp rise in oil prices. I have not seen this happen over longer time periods, but in the short run we are likely to see it from time to time.

For now, when the dollar is volatile and oil prices are extremely volatile, I’m a little less confident in our SectorCast outlook, specifically because of the ADR involvement. Nonetheless, we favor using sectors that include ADRs, which may represent attractive investments for hedging against a weakening dollar, and in some cases, even hedging against rising oil prices. In this week’s ETF Periscope, Daniel Sckolnik addresses this very issue.

4 Stock Ideas for this Market

This week, I thought I’d seek out some stocks that might do well if the market finds some support this week and rallies again. I started with the Small Cap Momentum preset search in MyStockFinder (http://MyStockFinder.com) I then up-weighted Insider Buying. Here are four stock ideas worth considering. All have shown strong earnings and price momentum.

Hardinge Inc. (HDNG) – Capital Goods
Innospec Inc. (IOSP) – Basic Industries
Sunrise Senior Living (SRZ) – Healthcare
Brooks Automation (BRKS) – Technology


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