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The market shrugged off the serious instability in the Middle East today, after tanking on those fears on Friday. The Dow, the Nasdaq, and the S&P 500 were all up, with the S&P 500 up the most, +0.77%.

But the fear is still there, as well it should be. VIX – the indicator that monitors the level of investor fears — jumped 24% on Friday, but fell back a bit yesterday. The VXX – the forward-looking fear indicator which tracks the iPath S&P 500 VIX Short Term Futures — rose almost 10% on Friday and is holding at that level.

This reflects the turmoil in Egypt and the fear of a “rolling awakening” in the Middle East with other counties attempting to overthrow their leaders. Add to that the twin nuclear threats of Iran and Korea and the continuing instability of Pakistan and Afghanistan, and you have just cause for alarm.

The fear, of course, is not just of rioting in the streets, but of serious economic consequences, namely unstable oil and other commodity prices. Monday, Energy and Basic Industries — fueled by rising energy and materials prices — drove the market. This increases the fear that the Fed will dip into its inflation-fighting arsenal and raise interest rates.

Of course, rising interest rates, while normally not good for the market, may drive money from the bond market into equities, as bonds are much more adversely affected by rising interest rates. Keep in mind, too, the extreme liquidity within the current corporate market. I believe it to be the most liquid corporate environment we’ve had in recent memory.

Earnings & Economic Reports. Domestically, there was turbulence in the earnings reports released last week, as some major companies met expectations — Netflix (NFLX), Dupont (DD) and Caterpillar (CAT) — while others disappointed — Amazon.com (AMZN), Ford (F) and American Express (AXP). This disparity demonstrates the economic uncertainties that face companies even in the same industry.

Economically, the recent reports were a mish-mash of positive and negative. Fourth quarter GDP accelerated to +3.2% (just a tiny bit less than expected) and new home sales jumped +18% in December with pending home sales rising a modest +2%. Durable goods, on the other hand, were downright ugly (losing -2.5% when an increase of +1.5% was expected). And initial jobless claims shot back up to 454,000 — a distressing figure not seen since October. Consumer sentiment improved, but of course, consumers were not yet aware of the new developments in the Middle East when that reading was taken.

As I said, a mish-mash.

Yesterday, against the roiling international backdrop, we had some good economic news. Personal income rose +4% for the second consecutive month, and the Chicago PMI came in at 68.8, reflecting stronger business conditions, as least in the Chicago area.

This week is an important one, for both economic reports and earnings reports. The greatest number of major earnings announcements to be released in any one week happens this week. Upcoming economic reports include auto sales, construction spending, and the ISM manufacturing index on Tuesday; factory orders and the weekly initial jobless claims on Thursday. And on Friday, we’ll get a peek at the official unemployment number, with the monthly Employment Situation Report. Perhaps these numbers will point to some clear direction for the market.

Market Stats. Looking back at last week, the worst cap/style was Large-cap Value (-0.59%), with all large caps in negative territory. Small caps in general seem relatively unaffected by the political and economic turbulence, with Small-cap Value leading, up +0.5%.

As for sectors, last week’s sector performance came in reasonably close to our forward-looking SectorCast model, with Capital Goods, Technology and Energy the winners. The Middle East turbulence fueled rising oil prices which contributed to the surge in energy stocks. Capital Goods were up on inflationary fears, and the performance of small-cap stocks helped lift the Technology Sector.

Among last week’s laggards were Consumer Non-Durables and Health Care — surprising to me, as these two sectors are normally thought to be stable in a chaotic market. Normally, you wouldn’t expect them to be near the bottom in the current environment. Finance would be expected to lag, as it did.

Looking Forward. Basic Industries appears to be the safest place to be, with Technology and Finance close behind. The scariest place to be? Any kind of consumer-related or transportation stocks, the latter because of rising oil prices and the global political unrest.

So stay with conservative stocks with strong cash flow and solid growth among commodities, energy-based stocks, and those in the Basic Industries.

4 Stock Ideas for This Market

This week, I started with the Undervalued Large-Cap Growth preset search in MyStockFinder. I then included Mid Caps and up-weighted Technicals and Insider Buying. Here are four intriguing stock ideas worth considering.

Rockwood Holdings (ROC) – Basic Industries
AVX Corporation (AVX) – Technology
Valero Energy (VLO) – Energy
Avnet, Inc. (AVT) – Capital Goods

Source: Market Is Up Despite Mid-East Turmoil and Increased Worry