The abundance of news last week — most with a positive slant — finally boosted the S&P 500 out of the Channel of Gloom in which it was mired for so long. Not only did the S&P 500 break out of the channel, but it is now threatening the 200-day moving average, having surpassed the 50-day MA last week.
Apple (NASDAQ:AAPL), Morgan Stanley (NYSE:MS), and Ford (NYSE:F) powered the corporate side with excellent earnings reports, while Monday’s positive news from FedEx (NYSE:FDX) and the housing industry — new home sales were up 23.6% in June — lifted the gloom from the economic side. To be sure, there were a few corporate disappointments last week — IBM’s (NYSE:IBM) revenues, Amazon’s (NASDAQ:AMZN) earnings, Google (NASDAQ:GOOG) — but on the economic side, most of the reports were at least tolerable.
All this positive news rapidly shifted the market from its flight to safety to chasing the bulls. The baby bulls led the charge, with all small-caps turning in a +6.5% or better performance. Among the small caps, small-cap growth was the best (+6.7%). The worst cap/style was large-cap value, up +3.3%, which is still pretty good.
Sector Review. As for sectors, Materials led the way last week, as predicted, followed by Industrials, Utilities (which continues to surprise) and Consumer Discretionary. Healthcare and Consumer Staples, normally safe havens, were trampled by the bulls at the bottom of the heap.
Sector behavior has been somewhat unpredictable these past few months, and I’d like to spend a few minutes explaining some of the challenges we face with our forward-looking model. Materials, for example, can move across the entire spectrum of rankings in one week, depending on the fluctuations in the dollar. Our model got it right the week of July 16, predicting Materials would be in the No. 1 spot last week, and sure enough it was, pacing a strong dollar. But in today’s returns (July 26), it trails dead last alongside a weak dollar. The current SectorCast predicts it will be in the middle this week.
Telecom sits in one of top three spots in the current forward rankings, but this is likely to happen only if we consider Telecom ADRs, as well as domestic Telecoms. Why? Because ADRs are much, much larger than U.S. telecoms, which have been doing poorly.
We can attribute the instability of the Healthcare predictions (#2 in the current forward rankings) to the impending healthcare reform, which makes it unclear who the winners and losers are. The future of the Financial Sector is also murky because of the significant reforms it faces, reforms that Bank of America claims could have very serious repercussions. The unreliability of Consumer Discretionary — it remains at the bottom of our projections, but ended up in the broad middle in last week’s returns — reflects the uncertainties in the whole mortgage market.
The Utilities Sector has been everywhere except where we expected it to be, and frankly, we have no idea why. The one sweet spot seems to be Information Technology. IT turns in a fairly decent performance week after week, regardless of the macroeconomic variables, and last week it came in seventh, despite bad reports from Google and Amazon.
So I will continue to share our forward-looking rankings. I just wanted you to know some of the challenges it presents.
The Week Ahead. We have another week of heavy economic news, which could threaten our baby bull. Today’s new home sales report, mentioned above, got the week off to a good start, but there are some biggies in the offing. On Tuesday we get the consumer confidence index; on Wednesday, durable goods; and on Thursday the weekly initial jobless claims. Friday is the blockbuster, with an advanced look at second quarter GDP, consumer sentiment, the Chicago PMI and the employment cost index.
Add to this mix a plethora of major corporate reports due this week. Today, FedEx raised its guidance, saying that Q3 should be significantly better than previously expected. Two insurance giants — Aetna (NYSE:AET) and Aflac (NYSE:AFL) — will report on Tuesday, and we’ll hear from technology bellwethers Sprint (NYSE:S) on Wednesday and Motorola (MOT) on Thursday. Also reporting on Wednesday are Boeing (NYSE:BA) and Visa (NYSE:V), and on Thursday, Exxon Mobil (NYSE:XOM) and Sony (NYSE:SNE). On Friday, Merck (NYSE:MRK) will give us a peek at the pharmaceutical sector.
A couple of wild cards bear watching on Wednesday. Las Vegas Sands (NYSE:LVS) will tell us if people are feeling confident enough to resume gambling, but the CIT Group (NYSE:CIT) on Tuesday could be the most crucial. This massive lender to the middle market, operating under bankruptcy protection, is expected to make $0.30, but the short interest has risen dramatically in recent weeks, as has call transactions and call/put ratios — which could signal a major surprise in either direction.
All in all, we have a week in which much could go right, but unfortunately the reverse is also quite possible.
4 Stock Ideas for This Market
This week, given the relative strength in small caps, I started with Sabrient’s Small Wonders preset search on MyStockFinder (http://MyStockFinder.com). Then, I adjusted the parameters by including both Small and Micro Caps, and upweighting Technicals. Here are 4 new stock ideas that look intriguing to me:
First Cash Financial Services (Nasdaq: FCFS) – Financials
National Technical Systems (Nasdaq: NTSC) – Industrials
TESSCO Technologies (Nasdaq: TESS) – InfoTech
Sturm, Ruger & Co. (NYSE: RGR) – Consumer Discretionary