What the Market Wants: Feels Like Groundhog Day

(Monday, October 5, 2009 - 5:18 pm PDT)
Today felt like Groundhog Day. Whereas in last week's newsletter I called the market "a mirror image" of its previous week, today it's the opposite. As I review last week's market performance, it's hard to find any changes from the prior week. In fact, last week virtually repeated the previous week's style/cap performance, with Small-cap Value the worst, losing 3.4%, and Large-cap Growth, the best, down 1.3%.

It was a week of mixed economic data. On the one hand, we had a positive GDP revision and positive consumer spending; on the other hand, there was a very poor and unexpected increase in jobless claims, along with the continuing rise in unemployment to a worrisome 9.8%. And if that wasn't enough, consumer confidence fell as well. Already in a negative mood, the market responded with a virtual repeat of the previous week's pattern.

Sectors & Industries Reflect Recessionary Worries. Not surprisingly, Consumer Staples was the only positive sector for the week, up 0.6%. This is normal behavior in a market that is worried about recessionary forces. For similar reasons, Health Care was second best, down 1.0%. Industrials turned in the worst performance, losing 3.5%, with Energy not much better.

Recessionary worries were reflected in the industry performance as well, with Beverages up 1.8% (can't do without our soft drinks). Personal Products was second, up 1.3%, led by Bare Escentuals (Nasdaq: BARE) and Kimberly-Clark (NYSE: KBM). Household Durables was by far the worst industry, down almost 6%.

Our new forward-looking SectorCast Rankings show Consumer Staples, coincidentally, in the top spot. Also somewhat not surprisingly, Utilities is ranked second and Health Care is third. Similarly, our new system grades Materials the lowest, with Industrials and Consumer Discretionary just slightly higher. Note that the Materials sector scored at the bottom, partially due to fairly high valuations versus mediocre projected earnings changes. This also reflects a lack of confidence in the marketplace for a significant economic recovery soon. (You can see the SectorCast rankings and other market segment stats at the Sabrient website: sabrient.com)

Market Rallies. Today, a strong recommendation on large-cap banks by Goldman Sachs has sent the market in a frenzied upward rally, very much like the news of a handful of mergers did last Monday. Last week, Monday was the only positive day, and, it remains to be seen whether we repeat the rest of the pattern this week since there is little new news.

Earnings season begins mid-week, and as you might expect this is a critical earnings season. The market will be watching very closely for not only meeting earnings expectations, but also increased revenue.

I recommend a cautious attitude, as I have for the past several weeks. Be willing to take profits on fully valued companies and prudently shop for bargains during pull-backs, while considering hedges against a continued market downdraft.

4 Stocks to Consider. One of last week’s picks, VimpelCom (NYSE: VIP) got a big 10% pop today on a merger announcement.

This week, I ran a MyStockFinder search (MyStockFinder.com) using the Hidden Gems preset search. These are smaller cap stocks that are flying “under the radar” of many analysts. Here are some stock ideas that look intriguing:

Almost Family, Inc. (Nasdaq: AFAM) – Healthcare (Healthcare Facilities)
EZCORP, Inc. (Nasdaq: EZPW) – Financials (Consumer Finance)
GT Solar International (Nasdaq: SOLR) – Industrials (Capital Goods)
Universal American Corp. (NYSE: UAM) – Healthcare (Healthcare Providers)

Until next week...

Full disclosure: No positions.