One Way To Play This Market

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 |  Includes: ARRS, MTH, WHR
by: David Brown

Monday, the SPY index closed at new highs while the S&P 500 was not able to make a new high, but closed strong, up about 0.3% on the day. The Russell 2000 (RUT) rebounded from a very weak performance over the past two weeks due to profit taking. Monday, it rose 1.15%, but volume was below average. One strong day should not trap us into believing the one year rally in small caps is resuming. It may be, but we need more than a one day rally to build confidence. While the RUT remains well above its 200 day EMA, it remains a tad below its 20 day EMA and more than 2% below its recent high. We would be extra cautious in the small cap area where many valuations have raised a tad above fully-valued status.

Congressional activities remain our largest concern as the rhetoric is once again beginning to ramp up about the debt ceiling and final budget approval. The economic indicators are starting to get more credibility as the government shutdown slowly recedes in the "rear view mirror." Industrial Production and the Chicago PMI were both quite positive over the past week. Factory Orders, which released two months of numbers today, were just ok. Last week's numbers on Retail Sales were decent, especially in light of the shutdown. Consumer Confidence and ADP employment numbers were also decent. So, risk is barely ON as we await some sign of a solution to the aforementioned congressional issues.

Market Stats

From a sector viewpoint we are going to use a slightly longer time horizon algorithm to base our sector outlooks. This algorithm is based on the iShares sector ETFs and hence is more tradable, if you prefer to do so. (See the Market stats). But we also like the longer outlook of 30 to 90 days. As you can see, this SectorCast is also published by Sabrient's Senior Vice President Scott Martindale in his weekly Sector Detector column. Currently, it is favoring Financials, Technology and Consumer Goods as well as Healthcare, which while not particularly accurate with respect to last week, was "on target" today. Obviously, we can't invest in "last week" positions, so we believe this sector strategy will be yield better results going forward.

We continue to seek out undervalued growth companies, which is becoming a tad more difficult to execute but far from impossible. As for hedging, we recommend at least considering the Ultra Short S&P 500 ProShares ETN (NYSEARCA:SDS). Or for even less exposure but equal protection, albeit for a limited time period, short term call options might be an inexpensive way to hedge the next several months of congressional risk. The VXX, while not well suited to long-term usage, could also be a relatively inexpensive put play by purchasing out of the money options and rolling them as you gauge progress or lack thereof in congressional negotiations.

3 Stock Ideas for this Market

I selected the following stocks from a custom search looking undervalued growth stocks with recent upward analyst revisions in MyStockFinder (*all data below from Yahoo! Finance and Reuters):

Arris Enterprises Inc. (NASDAQ:ARRS) -Technology

  • Trading for 9x forward earnings estimates
  • Positive earnings surprise in last three quarters
  • Analysts have revised earnings estimates up for next quarter in last 7 days
  • 60% projected EPS growth for current quarter, 25% next year, 38% over the next 5 years

Meritage Homes Corporation (NYSE:MTH)-Cyclical Consumer

  • Trading for 9x current earnings and 11x forward earnings estimates
  • Nearly all analysts have revised EPS estimates up in last 30 days
  • 60% projected EPS growth for the current quarter, 265% this year, 75% over the next 5 years

Whirlpool Corp (NYSE:WHR)-Cyclical Consumer

  • Trading for 15x current earnings and 12X forward earnings
  • Analysts revised EPS estimates up in last 30 days
  • 32% projected EPS growth for the current quarter, 21% next year, 29% over the next 5 years

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.