Here in Santa Barbara, where Sabrient is headquartered, “June Gloom” is that time of year when the marine layer and murky fog last until about noon every day before the sun finally burns its way through. The market seems to be enveloped in a similar gloom, and at this point we don’t know when the sun might come out to chase it away.
May was a horrid month for the market, with most market caps down approximately 10%, and the first week of June gave us little respite from the May malaise. Small-cap Value led the losers, down -6.4%, with Large-cap Growth being the best of the worst, losing -2.6%. This, combined with the sector lineup of Consumer Staples, Health Care and Utilities at the top, reflects a classic flight-to-safety.
Technically, the market continues to be weak with the S&P 500 well below its 200-day moving average.
The recent economic numbers have not been particularly strong or weak, but the news has been gloomy enough to hold the markets back, with the ramifications of the BP oil spill, the fall of the euro (exacerbated by Hungary’s surprise announcement on Friday), and the Israeli-Palestinian crises. As noted in last week’s letter, there’s just nothing to excite investors and quite a lot to depress them, and unfortunately, nothing much has changed that would improve anyone’s attitude.
True, containment of the oil spill has made a small amount of progress and the euro seems a bit more stable than it was last week; and true, Corporate America did quite well meeting or exceeding first quarter earnings targets. But most Q1 numbers are out, and we’ll have to wait a few weeks to get a sense of the second quarter.
This week’s economic reports started off with Monday’s consumer credit report of a $1 billion increase. This was a sharp disappointment to many who had expected a $2 billion decline, but we should note that this number is frequently subject to revision and can be interpreted in a number of ways. Nevertheless, it is not good news, and the market responded with a 1 to 2% sell-off.
As for other economic reports, on Wednesday we’ll see how wholesale inventories did last month, but it will be Thursday before we see the next initial jobless claims, trade balance and treasury budget data, and Friday before we know the status of retail sales and business inventories.
Looking Forward. Our forward-looking sector rankings are based to a large extent on corporate reports over the past quarter and projected returns over the next quarter, so Sabrient’s SectorCast continues to favor Materials, Financials and Energy, due to expected earnings and reasonable valuations in these sectors. However, this order may not hold for long. A strengthening dollar would be expected to drive down Materials stocks, and real estate worries and the final vestiges of financial reform continue to weigh heavily on the Financials Sector, despite improved earnings in financial stocks. And of course the consequences of the BP oil spill may plague the Energy Sector for a long time to come.
With investors pretty much in a flight-to-safety mood, we have no choice but to be very prudent in our current investments. We continue to suggest taking profits on overvalued securities and hedge where feasible, but also look for bargains. This pullback has created good valuations among stocks that have been penalized more than necessary.
4 Stock Ideas for This Market
Like last week, I conservatively started with Sabrient’s Undervalued Large Cap Growth preset search on MyStockFinder (http://MyStockFinder.com). Then, I also included Mid Caps and up-weighted Technicals. Here are 4 interesting stock ideas from a variety of sectors:
Advance Auto Parts (NYSE: AAP) – Consumer Discretionary
Fomento Economico Mexicano ADR (NYSE: FMX) – Consumer Staples
Hatteras Financial (NYSE: HTS) – Financials
Medco Health Solutions (NYSE: MHS) – Healthcare