Confusion continues to reign across the global marketplace. If there’s no safe place to invest, does that mean you should invest nowhere? Or should you invest where it’s relatively safe?
To put things into perspective, let’s start with the backdrop to last week’s market behavior.
As you recall, we had come off a pretty bad week related to the data glitch on Thursday, May 6, and as I reported last week, the market decided that was not a real problem and the situation in Greece seemed resolved. So on Monday the 10th, we had one of the most bullish days in several months. Tuesday was fine, and then on Wednesday the 12th, the government fired a warning shot across our bow in the morning with trade balance data that was worse than at least I expected, but not too bad according to most folks. Then at 2 o’clock Eastern time that day, they hit us dead center with one of the worst Treasury reports in memory.
Not only was the deficit worse than the consensus figure of $40 billion and the prior month’s figure of $65.4 billion, the government was blasé in reporting a $82.7 billion deficit – more than double the consensus estimates. If you look carefully at a minute-by-minute trading chart since that announcement, the market has drifted steadily downward ever since.
The slightly poor jobless claims number on Thursday certainly didn’t help, and the fact that retail sales and industrial production were about as expected simply kept things from being worse. So the market is operating against this very negative backdrop, led by the unexpected Treasury deficit and amplified by the oil spill in the Gulf of Mexico, government debt worldwide, and concern about Wall Street in general.
On the brighter side, companies seem to have adapted to the difficult credit and uninspired economic environment, and have figured out how to generate earnings, often well above targets. And despite woeful unemployment, consumer confidence remains more optimistic than one would expect. If we can avoid fall-out inflation from the mounting government debt (and I’m not sure that can be done), we may still have a decent market, since valuations in general remain modest.
Monthly Vs. Weekly Stats. I would like to paint a rational view of this market lest we look at last week’s nice numbers and become overly enthusiastic. Sabrient market stats show a quite different picture between last week and the week before. If you don’t think about these stats, last week’s gains in all cap-styles look pretty good, led by the sharp +6.4% increase in Small-cap Value and even the +2.3% increase in Large-cap Value, which brought up the bottom.
But the picture is quite different if we look at the week following the Treasury announcement. Since the announcement on Wednesday afternoon through midday today, there was a nasty drop of almost 8%, especially for large caps. While we closed today with a rally after being down nearly 2%, the overall market movement over the past month has been steadily downward.
My point here is that we should pay more attention to the one-month numbers and look with a jaundiced eye at the last calendar week.
Sectors. You can glean a sense of the market’s confusion by looking at the sectors. Surprisingly, the Industrials Sector led, up +4.8%, which is a general bullish sign, but Utilities, the classic flight-to-safety sector, came in second at +3.3%. And then Healthcare, which is also normally a safe haven for investors, was dead last, up only +1.5%, but of course there is still the health care crisis spooking would-be investors.
Materials did okay, despite the strong dollar rally which didn’t seem deserved in light of the reported $82.7 billion deficit. Perhaps the dollar found its strength in comparison to the currencies of those European countries known as PIIGS (Portugal, Italy, Ireland, Greece and Spain). But the big picture is not pretty and is fraught with dangers.
Looking ahead, our sector model favors Materials although the continued strength in the dollar will not help in that sector. Energy and Financials also look appealing, but then there is the offshore oil spill and Congress’s intention to spill on Wall Street. I would discount the lowly position of Industrials, as it was brought down by the questionable market behavior the past few weeks and months. Information Technology looks like a prudent bet.
We emphasize caution, buying undervalued companies in strong sectors and hedging where possible.
4 Stock Ideas for this Week
Like last week, I conservatively started with Sabrient’s Undervalued Large Cap Growth preset search on MyStockFinder (http://MyStockFinder.com). Then, I also asked for mid and small caps and slightly up-weighted Technicals, Analyst Upgrades, and Insider Buying. Here are 4 new stock ideas from a variety of sectors: