Santa Fed Just Keeps on Giving

by: David Brown

Is that Santa Claus streaking across the sky with a sleigh full of toys? Nah, it’s good ol’ Santa Fed dropping bags of POMO money into the economy . . . and it seems to be working, at least on some levels.

The dollar was up last week, signaling that our POMO bailout is more palatable than the similar bailout going on in the European Union. Treasury yields fell a bit last week, which is to be expected with the Fed sinking billions of dollars into Treasury bonds every day, so investors are flocking to stocks, pushing the market to a string of two-year highs, as it edges back toward pre-subprime crash levels. Today, the S&P 500 reached yet another 27-month high, touching 1250 before dropping back a bit to close up 3 points, at 1247.

The fact is, the market seems fearless, with the VIX (the so-called “fear indicator”) near a low for the year, at 16, and the forward-looking VIX is even lower.

We fully expect the market to keep moving higher, slowly, unless we get a jolt from the GDP report on Wednesday. A much-higher-than-expected number could move the market sharply higher, while a much-lower-than-expected number could send the market reeling. Chances are, neither extreme will happen.

After that, Santa will lead us into Christmas Eve with a bag full of economic reports on Thursday, including personal income, durable goods, initial jobless claims, new home sales, and the Michigan sentiment indicator. We’ll have to wait and see whether the bag is filled with candy or coal.

Market Stats. Small-cap Growth continued to dominate the cap/styles, up +0.77% last week, clinching the trophy as the clear winner for 2010. Interestingly, Small-cap Value was the only negative cap-style last week, and your guess is as good as mine as to why that was the case.

As for sectors, Health Care did somewhat better than our SectorCast projected, leading the sector performance last week, at +1.8%. Consumer Non-durables was second, at +1.5%, as expected, buoyed by better-than-expected retail sales. Consumer Durables was up much more than expected (+1.1%), anticipating that the housing starts and permits — which were up last week — will turn into new home sales. (Watch for the report on Thursday to see if the market was correct to bet on the starts & permits.)

The worst place to be last week was the Finance Sector, down -1.5%, as lingering concerns about the health of the banking industry resurfaced. Transportation dropped almost 1%, and Consumer Services and Energy were both down slightly.

Our forward-looking SectorCast did a bit of a shuffle, with Basic Industries moving to the top, fueled perhaps by last week’s solid industrial production report. Financial stocks are still sporting attractive valuations, but there are some scary ghosts lurking in bank vaults that could haunt investors well into the future. I’m talking about commercial real estate loans, which haven’t made big bad headlines yet, and the final disposition of subprime mortgages. Technology and Health Care continue to look solid.

The worst sector, looking forward, is Transportation, pulled down by the uncertainties about oil prices and travel. Consumer Durables is also at the bottom, indicating that our forward-looking SectorCast doesn’t expect new home sales to track last week’s upbeat housing starts and permits. (SectorCast relies heavily on changes in analysts’ earnings projections.)

The Bottom Line. The bottom line is that nothing short of a real shocker is likely to move this market down. With the VIX near its low for the year and the forward-looking VIX even lower, there is little fear that Santa will bring coal instead of candy. Of course, Santa doesn’t always bring us what we want.

4 Stock Ideas for This Market

This week, I started with Sabrient’s GARP (Growth At a Reasonable Price) preset search on MyStockFinder ( to identify Strong Buys that are still priced well relative to their growth prospects. I limited the search to small-caps in the four sectors ranked at the top of SectorCast: Basic Industries, Finance, Technology and Health Care. And the winners are:

Almost Family, Inc. (NASDAQ:AFAM) — Health Care
Fushi Copperweld, Inc. (NASDAQ:FSIN) — Basic Industries
Kulicke & Soffa Industries, Inc. (NASDAQ:KLIC) — Technology
Mig Meadowbrook Insurance Group, Inc. (NYSE:MIG) — Finance