Bulls Ignore Economic Indicators

Includes: BZ, CBEH, CYH, RGA
by: David Brown

If the bulls had been paying attention to the economic indicators reported last week, you’d assume the market would be down substantially by now. The fact is, however, that the S&P 500 is just down about -0.4% for the past calendar week, and Monday it was up over a full percent. Obviously, the bulls didn’t see the surprising drop in Consumer Confidence, which fell to 46.0 from 56.6 in January, its lowest reading since early last year. Moreover, the lesser known Present Situation Index fell to 19.4, its lowest level in 27 years (which was in February 1983 when it was at 17.5).

The bulls also seemed to have missed a couple of other negative numbers: New Home Sales, 309K instead of 360K and Initial Jobless Claims, 496K vs. 460K. And their heads were buried somewhere other than The Wall Street Journal this morning when the stream of negative numbers continued: Personal Income, 0.1% vs. an expected 0.4%; Construction Spending, down 0.6%; and the ISM Manufacturing Index for February, 56.5 rather than the expected 57.9.

We can only assume that the bulls aren’t reading The Journal or any other financial media, as the market closed up strongly Monday. When the bulls are ready to rally, they love to climb a wall of worry. The S&P 500 index, by the way, has been somewhat range-bound since crossing 1000 on September 4 and moving between 1000-1150 ever since.

Possibly, this lack of traction for the negative economic news was the flurry of mergers announced Monday morning, a major one for AIG, which sold one of its divisions for more than $35 billion. But that theory is a bit suspect since the whole market was up and not led by the merger stocks.

Sectors. Our sector stats contained a few surprises as well. The top sector last week was Consumer Discretionary, led by unusually strong behavior from the retail (+1.8%) and auto (+1.3) industry groups, and within retailing, the sub-industry Catalog Retailers (+7.1%). Financials and Consumer Staples were also positive last week while Energy, Utilities and Materials were the worst, each down approximately 2%.

Click here to see the Market Stats.

Our forward sector outlook from our fundamentals-based and value-oriented SectorCast model now has Financials on top again, with Energy slipping to second and Telecom and Healthcare rounding out the top four. Despite last week’s aberrant behavior by Consumer Discretionary which put it in the top performance slot, it is still dead last in our SectorCast outlook rank, with Industrials and Utilities not far away.

In this environment, it would make sense to be cautious and stay with value stocks from the Small-cap or Mid-cap segments. As usual, use appropriate hedges where possible.

By the way, all four stocks recommended in my last issue are up nicely from last Tuesday’s opening.

4 Stocks Ideas for this Market

This week, I started with the Hidden Gems preset search on MyStockFinder. Then, I adjusted the parameters to include Small and Mid Caps (not Micro), asked for both Buys and Strong Buys, and up-weighted Technicals a bit. Here are 4 intriguing stock ideas from 4 different sectors:

Reinsurance Group of America (NYSE: RGA) – Financials
China Integrated Energy (Nasdaq: CBEH) – Energy
Community Health Systems (NYSE: CYH) – Healthcare
Boise, Inc. (NYSE: BZ) – Materials