Market Will Likely Challenge Earlier Highs This Week

Includes: GCO, SPRD, THO, VXX
by: David Brown

The market responded well Monday to good economic news and to the positive and somewhat surprising response to the election of a moderate Iranian President. Some moderation in Turkey didn't hurt either, and overnight positive markets in Asia and Europe gave bullish investors enough encouragement to buy equities broadly.

This drove all three major domestic indices up about 1% before a late small sell-off left the S&P 500 Index up nearly 1% and the Nasdaq and Dow Jones Industrial Average both up well over 0.5%. We think it likely that the market will challenge highs set in late May this week.

Monday's positive economic news included a Housing Market Index up to 52, well above last month's 44 reading and an expected 45. Even better, the Empire State Manufacturing Index jumped to 7.84 from last month's negative (-1.4) report and well past the expected reading of 0.5!

A number of additional economic reports will follow with the Consumer Price Index and housing starts Tuesday, followed on Wednesday by the FOMC forecasts and the Fed Chairman's press conference. These will be followed on Thursday by the weekly initial jobless claims, which were BETTER than expected last week, the PMI Manufacturing Index, existing homes sales, LEI, and the Philly Fed Survey.

Friday is quadruple witching day, which occurs when the contracts for stock index futures, stock index options, stock options, and single stock futures all expire on the same day. It will likely be quite a volatile day.

Analysts are generally positive about this week's economic reports, which probably explains Monday's rise of markets globally. Funds continue to flow toward equities and away from long-term fixed income as interest rates continue to creep upward.

Last week's style/cap leader was once again small-cap growth, which was down only 0.41%. Small-cap growth led the past month and past six months as well.

Large-cap growth lagged all other style/caps, down a full percent. Indeed, large-cap growth has now lagged the past six and 12 months, as large-cap valuations are a bit higher than mid-cap and small-cap stocks.

Here are the market stats.

Amid the uncertainties of last week, sectors were led by the classic flight-to-safety sectors Healthcare, Consumer Non-Cyclicals, and Utilities. The interesting variation from classic flight to safety was the preference for small caps. This was likely caused by global concerns and rising interest rates, both of which would impact larger companies more than smaller companies.

So this week we will favor small-cap and mid-cap companies that we believe are undervalued. We also continue to recommend the consideration of hedging using VIX-related instruments such as the VXX ETF.

4 Stock Ideas for this Market

I selected the following stocks from a MyStockFinder search, concentrating on undervalued small-cap and mid-cap stocks.

Genesco, Inc. (NYSE:GCO) -- Consumer Cyclicals -- Mid cap

  • Retailer and wholesaler of footwear, apparel and accessories.
  • Steady earnings growth with an expected 15.0% per year over next 5 years
  • Forward P/E of 10.92
  • Price on 6/17/2013: $70.01

Spreadtrum Communications, Inc. (NASDAQ:SPRD) - Technology - Small cap

  • Fabless semiconductor company with headquarters in Shanghai, China
  • Expected growth rate is 58.5% for current quarter, 72.7% for next quarter, 35.8% for 2013, and an average of 25.47% per year for next 5 years.
  • Undervalued with a forward P/E of 7.83.
  • Dividend yield: 2.1%
  • Price on 6/17/2013: $21.93

Thor Industries, Inc. (NYSE:THO) - Consumer Cyclicals - Mid cap

  • Manufactures and sells recreation vehicles and small and mid-size buses
  • Earnings growth expected to be 28.8% this year and 19.6% next year
  • Forward P/E of 13.65
  • Dividend yield: 1.6%
  • Price on 6/17/2013: $47.50

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.