What the Market Wants: Caution Or End of Year Window Dressing?

Today, with very little market moving news, the S&P 500 closed at 1808.4, yet another new closing daily high.  The index did touch the 1811 area on at least three distinctly different time slots creating a new resistance level.  But after last week’s bevy of positive economic surprises, the sharp gain of 1.1% on Friday, leaving the index just a tiny point away from its ninth consecutive up week, we can’t be too quick to suggest today was a topping rally.  For one thing, volume was quite low as traders seemed to be trying to sort out the odds on the earliest date of Fed tapering.  Estimates range from this month to March and even later. But it’s going to happen…so why so much emphasis on when?  Perhaps protection of end-of-the-year profits in so many fund managers portfolios?  I would bet on that.

Before we leave last week, we should note that the small caps finally had a slowdown with the Russell 2000 down nearly 1%.  Mid-cap Value led the style/caps, up 30 basis points. Sectors had an unusual week led by Technology, up 0.72%, followed by Utilities, up 0.29%.  You read that right; Technology #1 and Utilities #2.  I don’t recall that happening before. Consumer non-Cyclicals was the only other sector in the black, up 0.15%.  That sector is frequently pared with Utilities, so its performance is not such a big surprise.  Energy, Consumer Cyclicals and Telecom were at the bottom.  It all makes sense for a cautious market except for Technology’s leadership.  Investors seem to be torn between caution and end-of-the-year window dressing.

Market Stats

This week offers very little in the way of important economic indicators other than Thursday’s Retail Sales, the weekly peek at Initial Jobless Claims to see how real last week’s 298K figure was, and Business Inventories.  Most corporate quarterlies are already out there.  So, we are left to consider the reality in last week’s rumors that a budget deal might be forthcoming.  What a present that would be from our much maligned Congress!

Caution remains a major thought for this market.  Technology, Financials and Basic Materials are the top of our sector shopping list, but the real key is finding undervalued companies projected to grow regardless of their sector.

3 Stock Ideas for this Market

I selected the following stocks from a custom search looking for undervalued growth stocks with recent upward analyst revisions in MyStockFinder (*all data below from Yahoo! Finance):

Marathon Petroleum Corporation (MPC) –Energy

• Trading 12x current earnings estimates and 10x forward earnings estimates
• Analysts have revised earnings estimates up in the last 30 days
• 42% projected EPS growth for next year, 11% over the next 5 years

Valero Energy Corporation (VLO)—Energy

• Trading for 10x current earnings estimates and 9x forward earnings estimates
• Analysts have revised EPS estimates up in last 5 days
• 52% projected EPS growth next year, 5% over the next 5 years

Prudential Financial Inc. (PRU)—Financials

• Trading for 9x forward earnings estimates
• Analysts have revised EPS estimates up in last 30 days
• 29% projected EPS growth for the current quarter, 53% this year, 14% over the next 5 years