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What the Market Wants: More Sentiment but Less Confidence

Posted on the 30 May 2012 by Phil's Stock World @philstockworld

Editor’s note: Walt Gault is the guest author this week. David Brown will be back next week.

What the Market Wants: More Sentiment but less Confidence
Last week was bullish overall (see Market Stats below), albeit on low volume, with economic reports slightly positive as a whole. The latest Dallas Fed Manufacturing Survey indicated that manufacturing is slowing in terms of growth but not declining. It was topped with a very good Consumer Sentiment number on Friday that not only beat consensus estimates but also hit its strongest point so far in the recovery phase.  Today’s Consumer Confidence was less than expected, coming in at 64.9, nearly 5 points below the consensus estimate. While the consumer reports appear to be conflicting, I’m interpreting them as follows: Consumers are comfortable with the way the economy is progressing and they aren’t rattled by the Euro fiasco (sentiment); but looking forward, they are unsure of what lies ahead (confidence).

The Eurozone outlook is a bit better, although the Euro itself was off. Hopes for a Greek resolution are more optimistic, at least this week. It seems that Germany’s tough, austere attitude towards its European neighbors has no bite behind it. They are so tied through imports and exports that Germany’s economy would likely slump if it does not go along with the bailout.

One of Sabrient’s senior analysts, Daniel Sckolnik, sees signs of an orderly Greek default. He says if investors are able to step back from all the “noise” that is generated from out of the Eurozone on a near-daily basis, they may be able to gain an objective perspective as to what is actually occurring there. Greece is one of the smaller economies, of course, but it is the most likely member-country to default on its debt, particularly as its own credit ratings are deep into the “junk bond” territory. It will hold June elections, and the chances of yet another anti-austerity leader emerging is at the least a coin toss away from occurring. The fact remains that this is not all occurring all at once, which means that the markets are reactive, but not to extremes. But, as current leaders in the Eurozone are now speaking publicly about preparations for a Greek exit, you can rest assured they have already executed whatever safeguards they are able to in order to avoid a disorderly Greek default. Objectively speaking, what is occurring now is what an orderly default most likely looks like. Visit Sabrient’s complimentary MacroReportInteractive for more details on an orderly Greek default scenario.

Spain is back in the headlines now that its banks need bailouts. The fourth largest Spanish bank needs 23 billion Euros to avoid bankruptcy.

China has finally accepted that their economy is slowing; now that they’ve tapped out the real-estate market, they’re turning to infra-structure improvements in an attempt to boost growth.

So with this mixed bag of Macro events leaning positive, the S&P 500 was up 14.6 points today, and Sabrient’s 2012 Baker’s Dozen Portfolio was up over 2% as well, despite the overreaction to Seagate Technology’s (STX) downgrade. Notable performers in the portfolio were Dana Corporation (DAN) +5.53%, DXP Enterprises, Inc. (DXPE) +5.24%, and United Rentals, Inc. (URI) +4.77%.

Barclays downgraded STX to “equalweight” from “overweight” citing certain developments that could impact guidance as early as September. However, the -4.39% drop seems unwarranted–especially considering today’s market performance.  Although Dell’s (DELL) negative outlook sparked worry and concerns that SSDs (solid-state drives) could replace HDDS (hard-disk drives), Seagate is well-equipped to handle the SSD business and has had four consecutive earnings surprises. Furthermore, its astounding EPS growth rates can be picked up for a forward P/E of only 2.66!

Here are the market stats.

Market Stats. All cap/style groups were positive last week with Mid-cap Growth leading, up +3.49% and Large-cap Value coming in last at +1.69%. However, over the last 12 months, Large-cap Growth is the strongest performing style/cap category, growing +3.98%.

Last week’s SectorCast proved to be accurate. Basic Materials, Industrials, and Financials were all near the top, with Energy and Technology in the middle, and Telecom and Utilities remaining weak. Keep an eye on Cyclical Consumers, last week’s strongest performer but also a wildcard.

Valuations remain cheap. Buy Growth at a Reasonable Price. If you’d like to hedge with a Euro ETF, we recommend buying puts on EWP, an index consisting of stocks primarily traded on Madrid’s stock exchange.

4 Stock Ideas for this Market

This week, I used the Large-cap Growth preset search in MyStockFinder. Here are four stock ideas for your consideration:

Seagate Technology (STX)–Technology
Celgene Corp. (CELG)–Healthcare
Metlife, Inc.  (MET)—Financials
PACCAR, Inc. (PCAR)—Industrials

Until next week,

Walter Gault
Communications Editor & Stock Analyst
Sabrient Systems, LLC.
Leaders in Investment Research
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Full disclosure:  The author does not hold positions in any of the stocks mentioned in this article.

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.

Editor’s Note.

David Brown, chief market strategist for Sabrient Systems, is a former NASA scientist, retired CEO of Telescan, Inc., and author of four books on investing.  (More about David)

Sabrient is a leading provider of independent, unbiased, quantitative equity research to institutions, portfolio managers, investment advisors, and hedge funds, as well as to self-directed investors. The firm is poised to take a quantum leap forward with FSYS, a cutting-edge, proprietary platform.  FSYS greatly advances Sabrient’s ability to create, build, test and execute powerful strategies.

About This Newsletter

Our goal in this newsletter is to use Sabrient’s quantitative methodology to provide the best hunting ground for styles, caps, and sectors for both longs and shorts – and to provide guidance in areas where you may want to be cautious versus aggressive in your portfolio. Also, this newsletter is for you. So we welcome your suggestions as to information you would like to see included in this newsletter.

Seagate Technology (STX)–TechnologyCelgene Corp. (CELG)–HealthcareMetlife, Inc.  (MET)—FinancialsPACCAR, Inc. (PCAR)—Industrials

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