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What the Market Wants: Okay, Virginia, Maybe There is a Santa Claus . . .

Posted on the 28 December 2011 by Phil's Stock World @philstockworld

Courtesy of David Brown, Chief Market Strategist, Sabrient

What the Market Wants:  Okay, Virginia, Maybe There is a Santa Claus . . .

I am an optimist at heart and a nearly perpetual Bull when it comes to the market, but the pressure finally got to me—the troubles in Europe, the obstinacy of our Congress, and mostly negative economic results—all this finally turned me into a semi-Bear last Monday with my “Bah Humbug” warning that there is no Santa Claus and the Grinch might well steal Christmas.

That only goes to prove the Wall Street adage that when the last of the bulls give up, it’s time for the market to rally.

And indeed it did.

Large cap Value led the rally last week, up +4.4%, while Large-cap Growth, up a healthy + 3.3%, came in last.  The rest of the style-caps were up between 3% and 4%, albeit on low volume.

From a sector viewpoint, Energy was the best performer, up +4.9%, and Technology was the worst, up just +1.9%. Apparently, Technology was still suffering a hangover from Oracle’s disappointing earnings report. (And to add insult to injury, Oracle lost its patent case today against Google). 

Click here for market stats.

Wall Street adage aside, my capitulation to the Bears didn’t create this Bullish run.  It was the good news from economic front lines that drove the rally.

Virtually every economic release of the week beat the consensus estimates, including Jobless Claims, Michigan Sentiment Index; Leading Economic Indicators (LEI); and Durable Goods. Add to that the grand slam by the housing industry, with Housing Starts, Housing Permits, New Home Sales, and even Existing Home Sales, all beating their prior readings—and except for Existing Home Sales, all handily beat consensus estimates.  This morning’s Consumer Confidence Report came in at 64.5, well above the expected 59 and last month’s reading of 55.2.

The week brought more good news from Europe. Spanish bonds got a visit from Santa and sold well below expected yields.  The European Central Bank handed out considerably more money than had been anticipated, although this could be viewed positively or negatively—positive that they did it, or negative that they needed to do it.

Politically, our Grinch-like Congress managed to get into the Christmas spirit long enough to eke out a two-month extension of the payroll tax cuts and unemployment benefits. What a Congress we now have!

Despite all the good news, I’m not jumping back into my Bull costume just yet, as the week’s rally merely put the S&P 500 Index flat for the year.  Uncertainties still abound.  Today, Sears announced that it would close more Sears and Kmart stores, due to poor sales. The S&P Case-Shiller Housing Price Index released today was worse than expected, down -3.4%,   (To be fair, we should note that this is a reading from 30 days ago, based on a three-month moving average, so it is hardly current information. )

In addition, there is the new uncertainty in North Korea, with the death of President Kim Jong-il; and serious disputes and terrorist activity continue throughout most of the Arab countries.   And when Congress comes back to work next week, it will likely resume its stalemate over arguments about what to do about the payroll tax-cut and unemployment benefits when the two-month extension runs out, as well as anything else that it needs to do.

Nonetheless, exactly one week ago the S&P 500 Index was at 1200, below its 30-day, 50-day, and 200-day moving averages, and today it closed at 1265, which is above its 30-day, 50-day, and 200-day MA. So technicians are probably frolicking in the snow and praising Santa Claus.

But I don’t believe in technicals any more than I believe in Santa Claus.

So where should we invest this last week of the year?

Our forward looking SectorCast continues to point to Health Care, Energy, and Basic Materials as the best places to be (SectorCast got these right last week), and Cyclical Consumer, Non-Cyclical Consumer, and Utilities as the worst places to be.  I would continue to avoid Financials but would consider adding, with some caution, Technology, Telecom, and Industrials.

By the way, gaming stocks were among the leaders today, due to the Justice Department’s tentative ruling that states may offer online gambling to their residents. Gaming stocks may benefit from the ruling, but as for online gambling itself, just remember that in all forms of betting against the house, the odds are stacked against you.  And if you’re among those who equate investing in stocks with gambling, let me remind you that in the stock market, odds are stacked in your favor in the long haul.

4 Stock Ideas for this Market

This week, I used a modified GARP (growth at a reasonable price) preset search in MyStockFinder (http://MyStockFinder.com). I included Buys along with Strong Buys, and limited the search to four sectors:  Health Care, Basic Industries, Energy, and Technology. Here are four stock ideas that look intriguing:

Apple, Inc. (AAPL) – Large Cap, Technology
CF Industries Holdings, Inc. (CF) –Large cap, Basic Industries
Holly Frontier Corporation (HFC) – Mid-cap, Energy
United Therapeutics Corporation (UTHR) – Mid-cap, Health Care

Until next week,

David Brown

Full disclosure: The author holds no positions in this week’s “stock ideas.”


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