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What the Market Wants: One-Day Bounce Or Return to the Bulls?

Posted on the 10 May 2011 by Phil's Stock World @philstockworld

Courtesy of David Brown, Chief Market Strategist, Sabrient

One-Day Bounce or Return to the Bulls?

by David Brown, Chief Market Strategist, Sabrient Systems

What the Market Wants:  One-Day Bounce or Return to the Bulls?
The market was strong today, fueled no doubt by surging oil prices (up +5% for the day), a mildly weak dollar, and a fairly significant drop in the level of “fear” as measured by the VIX.  So the market moved boldly forward, with the S&P 500 closing at 1346.29, up +0.45%

Today’s market strength was in direct contrast to the sell-off last week, which was surprising, in light of the positive news of Bin Laden’s demise and a tide of good economic reports the  first half of the week. Construction spending was well above estimates (+1.4% vs. an estimated +0.5%); factory orders were outstanding (+3% vs. an estimated +2%); and the ISM manufacturing index was solid at 60.4 vs. an estimated 59.5.

The sell-off continued on Wednesday, this time in step with a couple of negative reports. The ISM non-manufacturing index showed a sudden slowing of business growth, with a reading of 52.8 vs. the expected 57.0; and Thursday’s initial jobless claims came uncomfortably close to the half-million mark, rising to 475,000 vs. the estimated 400,000.  Although Friday’s employment report showed non-farm payrolls increasing by 244,000 (vs. an estimated 185,000), that good news was tempered by a rise in the unemployment rate from 8.8% to 9%.

Despite the mostly positive news, the S&P 500 lost about 2% for the week, although it closed up slightly on Friday.    

Market stats.  Small-cap Growth, the leading cap/style for most of last year, was down a startling -3.9% last week, with the leading cap/style, Mid-cap Growth, still losing -1.6%.

Oil prices fell throughout last week, so it was no surprise that Transportation rose to the top in sector performance  (+0.15%), and Energy sank to the bottom (-6.88%). Health Care, the only other positive sector for the week (+0.11%) came in second as predicted, and Technology, down -1.34%, was right in the middle and  only slightly lower than expected. (Here are the market stats.)

The surprise was the contrary behavior of the consumer-related sectors. All three were projected to be in the bottom 5 but lined up in the top 5 instead: Consumer Services, #3; Consumer Non-durables, #4, and Consumer Durables, #5.

Another surprise was Finance, projected to be #3 and landing in the 8th position with a -1.95% loss for the week.  Today, Finance tanked big-time, turning in the worst sector performance of the day.  This was partially triggered by the 1-10 reverse split of Citigroup (C). Historically, a reverse split has a negative impact on a stock, and it certainly cost Citigroup shareholders some money today.

Basic Industries continued to disappoint.  Projected to be the leader, it fell all the way to #10 in actual performance (-5%), presumably in response to the negative ISM report on economic growth and a bounce in the dollar.

Coming up.  Today’s market strength could be siphoned by this week’s economic numbers, if they turn out to be negative.  Tomorrow’s report on exports and imports is unlikely to be impactful, but wholesale inventories could offer some insight into the health of retail sales, which reports on Thursday.  The trade balance numbers always have the potential to upset the market. Look for that report on Wednesday, and pray for better news from Thursday’s initial jobless claims.  Thursday also brings the PPI and business inventories, and on Friday, we’ll get the CPI and Michigan sentiment.

The bottom line is, these reports will reveal whether economic growth is continuing and whether or not it is being shadowed by inflation.  From all indications, a surge in inflation is unlikely.

So where do we go from here?

It’s hard to judge whether resurgent oil prices and a weak dollar are the sole basis of today’s rally, or whether the market believes that the Fed will continue to be accommodating, despite the end of QE2.  The final three weeks of corporate earnings finished very strong, with positive surprises outnumbering negative surprises more than 4 to 1.  Valuations are reasonable, assuming the economy continues to grow, albeit it slowly.

So, to answer my own question, we stay right where we are, in the stock market, as there is, frankly, no other reasonable place to put your dollars at this time.

4 Stock Ideas for this Market

This week, I started with the Momentum Small Caps preset search in MyStockFinder (http://MyStockFinder.com). I then included Buys (in addition to Strong Buys). Here are four stock ideas that seem primed to outperform in a bullish market:

NL Industries (NL) – Basic Industries
Newpark Resources (NR) – Energy
Coleman Cable (CCIX) – Capital Goods
Rudolph Technologies (RTEC) – 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.

 


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