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What the Market Wants: Proceed with Caution

Posted on the 24 May 2011 by Phil's Stock World @philstockworld

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Courtesy of David Brown, Chief Market Strategist, Sabrient

What the Market Wants: Proceed with Caution
The market began the week down, with the S&P 500 closing at 1317. After three consecutive down-weeks, the S&P 500 has lost -4.5% from its May 2nd high and now hovers below its 30-day and 50-day moving averages in a generally negative technical position.

It seems investors finally took stock of the problems lurking outside of Wall Street, specifically Europe’s sovereign debt problems and China’s slowing growth.(Daniel Sckolnik’s posting today on the Sabrient blog (”ETF Periscope: Spain Protests Just May Cause the Running Away of the Bulls“) presents a cogent overview of Europe’s debt problem and paints the dire picture in Spain very well.)

Of course, Europe’s and China’s problems strengthened the dollar, which has battered commodity stocks and the market in general over the past year. While the dollar was pretty much flat last week, it is up 6% from its recent low. Oil prices strengthened a bit but remain down 10% from their recent high.

Other culprits added to the negative mood. Disappointing earnings releases from major companies like Cisco (CSCO), Hewlett-Packard (HPQ), Disney (DIS), Staples (SPLS), and the Gap (GAP) reflected the continued weakness in corporate earnings. Last week’s economic news cast a shadow over our struggling recovery. The Philly Fed report and Empire State index revealed a slowing in the growth of the manufacturing sector; housing starts and existing home sales came in lower than expected; and last week’s initial jobless claims remained stubbornly over 400,000.  

Market stats. Last week, Mid-cap Value was the only positive cap/style, up +0.3%. Small-cap Growth, investors’ darling of the past year, was the worst performer again last week, down -0.9%, as traders continued to take profits in this space. (Here are the market stats.)

Energy led the sectors, up +1.3%. Also positive were Utilities (+0.9%), Transportation (+0.8%), Basic Industries (+0.7%), and Consumer Non-Durables (+0.3%). The worst performer was Consumer Durables, down -2.2%, with Capital Goods and Technology joining in the down-more-than-1% group.  Technology’s poor performance was no doubt heightened by the disappointing earnings from Hewlett-Packard.

Our forward looking sector model continues to favor Basic Industries, followed closely by Energy, Health Care, and Capital Goods.

Coming up. This week, we will get more hard data about our economy. On Tuesday, new home sales will tell us whether the housing market is continuing to flail; Wednesday, durable goods will be closely watched; Thursday, initial jobless claims will try to break back under the 400K mark, and we’ll get our second look at first quarter GDP. On Friday, personal spending and Michigan sentiment chime in with their numbers.

It won’t take much more negativity to push the S&P 500 below its current support level of 1306, and if that is breached, 1257 is our next hope for a refuge.

What the market wants, frankly, is for the EU to bring its sovereign debt situation under control and for corporate America to resume strong earnings, which we won’t know until early July. All in all, I would suggest that we proceed with caution.

4 Stock Ideas for this Market

This week, I started with the GARP (Growth At a Reasonable Price) preset search in MyStockFinder (http://MyStockFinder.com). I then included Buys (in addition to Strong Buys) and increased the weighting in Long-Term Technicals. Here are four stock ideas from some of the higher-ranked sectors that look intriguing:

Ball Corp. (BLL) – Basic Industries
GT Solar (SOLR) – Energy
II-VI, Inc. (IIVI) – Capital Goods
LKQ Corp. (LKQX) – Consumer Durables

Until next week,

David Brown
 

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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