The Market Giveth and the Market Taketh Away

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Includes: ACE, ALB, ANTM, ARW
by: David Brown

Or is it the dollar that giveth and taketh away?

It’s hard to tell, because today has thrown a monkey’s wrench into the normal order of things. The dollar rose dramatically (up +0.8%) while the market rose right along with it for most of the day, and that’s not the usual order of things. Of course, the Fed’s $8-9 billion daily giveaway is not the normal order of things either.

A little background, if you please.

In the first round of quantitative easing (QE1), the Fed was pumping a mere $2 to $2.5 billion into the economy twice a week, calling it the Permanent Open Market Operations (POMO). When QE2 was announced on November 3, the POMO jumped to $8 to $9 billion daily, the dollar dropped like a rock, and then dropped again the following day. And gleefully—or dutifully, it’s hard to tell which—the market responded with a sharp rise to a new two-year high on November 4. That’s the usual order of things: Dollar down, Market up.

Then last week, it was as if the world woke up and said, Say What?

Related or not related, concerns developed immediately after the QE2 announcement about the strength of Ireland, Portugal and Greece (remember the PIIGS?). The point being that Ireland, Portugal and Greece can’t print money to ease their currency woes, the way the U.S. does. As a result, the dollar strengthened throughout last week, gaining more than 3% from the early low levels the week before. The market didn’t like that and gave back about half of what it had gained the week before. Again, the usual order of things: Dollar down, Market up.

But not today. Today, the dollar continued to rise, and so did the market, all the way up until the closing bell, when the S&P 500 dipped slightly into the red, closing at 1197.75, down -0.12%. (The Dow was barely positive, up +0.08%.)

And things get more confusing. Last week, with the market falling, the VIX—which measures the implied volatility of the S&P— rose, as it always does when fear begins to take hold. It was up 10% for the week. Today, the VIX fell 2%.

I wonder if you find this as contradictory as I do. The market’s exuberance early today could be attributed to the substantial acquisitions announced today by Caterpillar (NYSE:CAT) and EMC Corp. (EMC). Or maybe there’s something else in the air that’s disturbing the usual order of things. The point is, the market is not following its normal dollar-way-up/market-way-down behavior.

Market stats. In last week’s down market, Small-cap Value was hurt the most, losing -2.5%, and Mid-cap Growth was hurt the least, losing only -1.4%. Consumer Durables was the only positive sector, and Finance was at the very bottom, losing -3.6% after gaining 5.3% the week before.

Looking ahead. Today is only the second day of the Fed’s $8 billion daily giveaway. We have 17 more days to go (through December 9), so it may well be that the market hasn’t figured it all out yet. (Most foreign ministers seem to have figured it out and have voiced their displeasure with QE2, accompanied by various warnings and threats.) The fact is, there are more questions we can ask ourselves than we can find answers for. Can corporate earnings continue to grow, as they have throughout the year, while 10% of Americans stay unemployed? How much more can corporations cut expenses? Or do they simply shift all their jobs overseas? (Hopefully not!) And the biggest question of all, How do we pay back all these dollars that we’re “borrowing” for QE2?

In my market overview for my Investor’s (NYSE:H)Edge virtual portfolio last week, I pointed out that the rally last April looks suspiciously like the rally over the past couple of months, and that we should remember the 20% drop that followed that rally. Take a look for yourself:

Given the murky outlook, I can only recommend that you buy your stocks quite carefully, if you buy them at all, and use some form of hedging. The Sabrient blog contains several posts that talk about specific ways to hedge, including Daniel Sckolnik’s ETF Periscope and the daily posts by Phil Davis. You might also take a look at our Investor’s (H)Edge portfolio at http://www.sabrient.com/individuals/investors-hedge.php.

4 Stock Ideas for This Market

This week, I started with Sabrient’s Undervalued Large Cap Growth preset search on MyStockFinder (http://MyStockFinder.com). However, I made a number of additions to the preset parameters. I included Large, Mid and Small Caps, up-weighted Group Strength and Long-Term Technicals, and increased the importance of Revisions to Analysts’ Estimates to 10. Here are 4 new stock ideas that I found interesting (and they all start with an “A”):

ACE Ltd. (NYSE:ACE) – Financials
Arrow Electronics (NYSE:ARW) – Technology
AMERIGROUP Corp. (AGP) – Healthcare
Albemarle Corp. (NYSE:ALB) – Basic Industries