A Nervous Market Begins a New Quarter

Includes: BLK, EMN, IPXL, LEA
by: David Brown

The week began with a couple of mixed economic reports. Factory orders were lower at -0.5% instead of the expected -0.3%, but pending home sales were up nicely, at +4.3%. The dollar strengthened a bit against the euro, but a negative overhang from European markets spooked the nervous-Nellies, pushing the market down nearly a full percent on light volume.

The VIX, a measure of market volatility that is often referred to as the fear index, rose slightly today and may well rise higher, as the jittery bulls and speculative bears look ahead to this week’s major economic announcements. The main one comes on Friday, the monthly employment situation report, which is a set of labor market indicators based on two separate surveys, but before that is the ADP national employment report which, generally speaking, takes the employment pulse of small business. Other important reports on the horizon include two energy status reports (petroleum on Wednesday and natural gas on Thursday), and the weekly initial jobless claims on Thursday, but this week they are overshadowed by the two monthly employment reports.

This week also begins Q3 earnings season, with early bird Alcoa (NYSE:AA) reporting on Thursday.

Last week in review. An assortment of mixed economic signals last week sent the market essentially nowhere, with the S&P 500 losing about two points for the week. We had a very poor consumer confidence report on Monday, but by Thursday the Reuters/University of Michigan version said consumer confidence was reviving a bit. The Chicago PMI showed that business conditions in the Chicago area were also reviving. Also a tad improved were the revised GDP, construction spending, personal income, auto and truck sales, and the always important initial jobless claims.

M&A activity continued to churn, with several new announcements last week (nothing major though). The straggling Q2 earnings announcements included some misses, but again nothing major. Nonetheless, the whole week added up to virtually no change.

Small-caps led the week, with all styles up over +1.2%. Small-cap growth was the best, up +1.4%, and in fact, it was the best cap/style for the past month, up a whopping +10.4%. The other style/caps, not so good. All mid-caps were up only +0.5 to +0.9%, and large-caps were barely positive, with large-cap growth not quite making it to the plus side (-0.02%).

From a sector viewpoint, Energy led the week (+3.55%), followed by Industrials (+1.8%). Health care was the worst (-0.4%), with Finance not much better (-0.3%).

Looking forward. Our sector outlook model continues to favor Industrials, Finance and Consumer Durables, while eschewing Energy, Materials, and Consumer Services. That prediction came true today, for Materials at least, which was down -1.4% for the day, caused partially by the dollar’s strength against the euro. Technology stocks also fell -1.1% today, partially due to Goldman Sach’s downgrade on Microsoft (NASDAQ:MSFT).

4 Stock Ideas for This Market

This week, I am returning to a more conservative search on MyStockFinder (http://MyStockFinder.com). I started with the Undervalued Large Cap Growth preset search but also included Mid Caps. Furthermore, I upweighted Insider Buying and Analyst Revisions, and limited choices to the top-ranked sectors. Here are 4 stock ideas to consider:

Eastman Chemical Co. (NYSE: EMN) – Basic Industries
BlackRock, Inc. (NYSE: BLK) – Finance
Lear Corp. (NYSE: LEA) – Consumer Durables
Impax Laboratories (Nasdaq: IPXL) – Healthcare