Slipping and Sliding With the Market

Includes: BWLD, DDIC, MED, WMZ
by: David Brown

Our thundering herd of baby bulls struggled mightily last week to stay clear of that gloomy channel, and at one time the S&P 500 threatened to cross back under its 50-day moving average, but it ended the week about where it started.

The slipping and sliding were caused primarily by mixed news. Last week started off strong with new home sales coming in well above expectations, but consumer confidence and durable goods both missed their marks. To cap off the disappointing numbers, GDP came in on Friday at 2.4%, which was weaker than expected. Although it was only 0.1% below expectations, the bulk of that small growth seemed to be in inventory buildups and government spending.

Things turned on Friday, however, with the Chicago PMI coming in better than expected. That, combined with positive news over the weekend from European banks and Monday’s construction spending report beating expectations (+0.1% versus a negative -0.8%), powered the bulls. Monday the S&P 500 closed at 1125.86 (+2.2%), climbing well above its 200-day MA. Its new upward channel is now well formed.

Corporate earnings continued their solid streak throughout last week. With about two-thirds of the S&P 500 having reported, analysts estimate that Q2 earnings growth will be 30% better than the comparable quarter last year and revenues will be 10% better. To be sure, there have been mild disappointments here and there, but overwhelmingly, the majority of the companies have beat expectations.

Upcoming reports. Market moving events should start to slow down a bit this week, with fewer important economic reports and fewer public companies reporting. Monday’s reports—the ISM manufacturing index and the above-mentioned construction spending—were both positive (ISM was 55.5 versus an expected 54.0).

Tuesday we get personal income, factory orders, and auto and truck sales. Wednesday brings ADP employment and ISM services. Thursday we’ll have the weekly initial jobless claims and on Friday, the two reports with the potentially greatest impact: the unemployment rate and consumer credit.

Key companies reporting this week include MGM Resorts (NYSE:MGM), Cigna (NYSE:CI), Beazer Homes (NYSE:BZH), Loews (NYSE:L), Procter & Gamble (NYSE:PG), Pfizer (NYSE:PFE) and Kraft (KFT).

Market stats. The small-cap bulls did the best, with small-cap value up +3.7% for the week. Large-cap growth did the worst, up only +0.29%. In general, small caps led the mid caps which led the large caps, and value did better than growth.

Click here to see the market stats.

Few of the sectors did very well last week. Financials led, +3.5%, followed by Industrials, +2.1%. But Consumer Staples, Technology and Healthcare were all negative for the week. Our forward-looking SectorCast model continues to favor Financials, Technology and Energy and continues to project the two consumer sectors and Utilities at the low end of the rankings.

While there is still plenty to worry about, I believe it is time to be a little more aggressive in our investing by concentrating on small-cap and mid cap-growth companies.

4 Stock Ideas for This Market

This week, given the continued relative strength in small caps, I used Sabrient’s Momentum Small Caps preset search on MyStockFinder. Here are 4 new stock ideas that look interesting:

DDi Corp (Nasdaq: DDIC) – InfoTech
Williams Pipeline Partners (NYSE: WMZ) – Energy
Medifast (NYSE: MED) – Consumer Staples
Buffalo Wild Wings (Nasdaq: BWLD) – Consumer Discretionary

Disclosure: The author does not personally hold any of the stocks mentioned in this week’s “Stock Ideas.”