Despite a number of fairly important disappointments last week (details below), the market was up for the week. The likely reason is an overwhelming belief that the Fed will continue its easing policy; after all, this is election season. Another reason for ignoring bad news might be that investors have no real alternative. Treasuries and bonds are so low that it would be almost like stuffing your money under a mattress.
Today is a government holiday (Happy Columbus Day) so we have no economic reports until tomorrow when the FOMC minutes are released—a non-event since we already know the Fed is willing to ease its monetary policy even further. The Treasury report on Wednesday is important, of course, but we know it’s going to be bad news so that has already been factored into the market. Other reports include a lot of price numbers—export/import prices, producers price index (PPI), consumer price index (CPI)—but these are also non-events as no one is seriously worried about inflation.
The most important economic reports will come at the end of the week—trade balance on Thursday and retail sales on Friday. We simply have to improve our trade balance, and the falling dollar could help us there. Friday also has the Michigan consumer sentiment report and business inventories report.
The first full week of earnings season begins this week, but unless announcements—and guidance—are seriously negative, they are unlikely to stop the market’s upward trek. In fact, the market is behaving as if it doesn’t have a care in the world, based on the VIX (the CBOE volatility indicator). Nicknamed the “fear factor,” the VIX closed below 20 today (18.95) for the first time since April.
The week in review. Last week’s economic reports were a mixed bag. On the positive side were pending home sales and ISM services, but these were outweighed by negative reports–factory orders were poor; wholesale inventories were down; the ADP report was a shocker, showing small business employment down sharply; and the non-farm payroll report on Friday was disappointing. Yet the market was up for the week, with the S&P 500 up big two days, down one and flat the other two.
Small-cap value turned in the best performance, up +2.4%, and mid-caps, the worst, although still up +1.1%. It’s worth noting that small-cap growth—which was third-best this past week—has led the way over the last one month and three months, up +10.3% for the month and +13.3% for the past three months.
As for sectors, Industrials led the way (+3.4%), followed by Capital Goods (up +2.5% due primarily to the weak dollar), and Consumer Durables (+2.4%). These are encouraging signs for the economy. Technology, surprisingly, was the worst-performing sector, though still positive at +1.3%. Health Care (+1.4) and Consumer Non-durables (+1.6%) were only slightly better.
Looking ahead. Our sector outlook continues to find value in Financial stocks, as that sector considerably outdistances Consumer Durables, in second place, and Health Care, in third place, with Technology just a tad lower, in fourth. Consumer Services is the least favored sector looking forward, with Capital Goods and Energy almost as weak—and likely to remain weak if the dollar keeps falling.
4 Stock Ideas for This Market
This week, I started with Sabrient’s Small Wonders preset search on MyStockFinder (http://MyStockFinder.com). Then, I added in Small and Mid Caps along with Micro Caps and slightly upweighted technicals. Here are 4 new stock ideas from the top-ranked sectors that I found interesting: