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What the Market Wants: Where, Oh Where, Should We Put Our Money?

Posted on the 23 January 2012 by Phil's Stock World @philstockworld

Courtesy of David Brown, Chief Market Strategist, Sabrient

What the Market Wants:  Where, Oh Where, Should We Put Our Money?
From the market’s perspective, the first three weeks of the year have been okay:  Eight up days, four flat days and three poor days. But aside from one-day gains of about 1% on January 3 and 18, there hasn’t been much excitement.  The S&P 500 is up about 4% for the year, which, in itself, is quite fine, but if we look at the economic data released in the past three weeks, there’s not much to write home about.

True, factory orders and the Empire ISM readings were fine, but initial jobless claims have been poor to tepid; December retail sales, poor; and housing starts just ok. Corporate earnings have been a mixed bag, but average at best. Global politics are disconcertingly volatile, and our domestic politics are a mess.

So why should we put our money in the stock market?

Well, where else can we put it?

Treasuries? Not a chance! U.S. government bonds? Are you kidding! Corporate bonds?  Maybe. Real estate? How low is low enough? Gold or silver? How high is too high?

The good news is that cash is (almost) everywhere. Of course, the Federal government doesn’t have any cash, but it can just print some more (ouch!).  A number of pension funds don’t have enough either, as we all saw last week when Eastman Kodak (EK) bit the dust. (Several months ago, our subsidiary, Gradient Analytics identified EK and a number of other firms as problematic because of their underfunded pension funds; the list is proprietary so I can’t share the names with you.) Nonetheless, many pension funds need to invest their cash more wisely so look for more funds to return to the stock market from the fixed income investments where they rushed en masse after 2008. 

Corporations are drowning in cash, and mutual funds have more than adequate cash. All this cash has to go somewhere, and given the alternatives, that somewhere should be the stock market. That much cash flowing into the markets could create a tide that could lift all boats as much as 8 to 15% this year. Not a bonanza year, but better than any of the alternatives.

Given all that, well-priced stocks still look like a pretty good investment. The higher the earnings growth, dividends, and free cash flow—and the lower the price—the better we like them. A few ideas are below.

Market Stats. Small-cap Growth stocks did the best last week, but Large-cap Value did the best for the past 30 days. With regard to sectors, our forward-looking model likes Healthcare, Energy, Financials, and Utilities.

Here are the market stats.

4 Stock Ideas for this Market

This week, I created a custom search with MyStockFinder, emphasizing high value, high growth, high earnings revisions, and high earnings quality.  Here are four stock ideas for your consideration:

Halliburton Company (HAL) – Large-cap – Energy
RPC, Inc. (RES) – Mid-cap – Energy
Olympic Steel, Inc.  (ZEUS) – Small-cap – Basic Materials
Universal Health Services, Inc. (UHS) – Mid-cap – Healthcare

Until next week,

David Brown

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