New Year's Party at the Stock Exchanges Rages On

by: Scott Martindale

The stock market continues to shrug off threats to economic recovery in almost Pollyanna fashion. After testing how investors would react to resistance at Dow 12,000 and S&P 500 1300, as well as unrest in the Middle East, the bulls took control once again last week and easily pushed through those major psychological resistance levels. Those levels now serve as important support levels. Bulls are letting the bears know in no uncertain terms that they are not yet done with their New Year’s party.

The party has been raging since December 1 with only a couple of minor tests of the bulls’ resolve. After all, where else would one suggest that investors put their cash? With the Fed’s freshly minted bills making a beeline for stocks and commodities, investors are simply following the money trail. And today was no exception as all major indexes finished up strongly yet again.

Fear as measured by the VIX is back to low levels, reflecting investor confidence and complacency. Although it had spiked to above 20 during the initial crisis in Egypt, it has since returned to its long-term support around the 16 level. It closed today at 16.28, which was up 2.2% despite today’s market strength.

Cash levels in corporate coffers remain extremely high. In corporate takeovers announced today, Beckman Coulter (NYSE:BEC) will be acquired by Danaher (NYSE:DHR) for $83.50 per share in cash, which the companies said represents a premium of 45% over where the stock was trading on December 9 before takeover rumors came out. Also, driller Ensco PLC (NYSE:ESV) is buying Pride International (NYSE:PDE) rather than ordering its own new drilling rigs in order to gain access to the Texas company’s employees and customer base. PDE shareholders will receive a combination of shares and cash that amounts to $41.60 for each PDE share, reflecting a 21% premium over Friday’s closing price. The resulting company will become the world’s second-largest offshore-drilling contractor after Transocean Ltd. (NYSE:RIG).

Earnings & Economic Reports. Last week saw a lot of earnings reports. Overall, the reports were received positively. Some, like Whirlpool (WHR) and AFLAC (NYSE:AFL), missed consensus earnings calls, but Aetna (NYSE:AET), Electronic Arts (ERTS), Boston Scientific (NYSE:BSX), and Time Warner (NYSE:TWX) had upbeat reports. Pfizer (NYSE:PFE), (NASDAQ:BIDU), Anadarko Petroleum (NYSE:APC), United Parcel Service (NYSE:UPS), and Archer-Daniels Midland (NYSE:ADM) all beat bottom line expectations. BP Plc (NYSE:BP) came up a bit short, but has held up on other positive news. Ford Motor (NYSE:F), General Motors (NYSE:GM), and Toyota Motor (NYSE:TM) all reported strong January U.S. sales increases. Visa (NYSE:V) and MasterCard (NYSE:MA) posted upside earnings surprises. Healthcare reports from Pfizer (PFE), Cardinal Health (NYSE:CAH), Merck (NYSE:MRK) and CIGNA (NYSE:CI) were generally positive. Retailers generally saw stronger-than-expected same-store sales results, and BJ’s Wholesale (NYSE:BJ) was a standout.

This week, bellwethers reporting earnings include ArcelorMittal (NYSE:MT), Teva Pharmaceuticals (NYSE:TEVA), Coca-Cola (NYSE:KO), Allstate (NYSE:ALL), Cisco Systems (NASDAQ:CSCO), Prudential Financial (NYSE:PRU), Northrop Grumman (NYSE:NOC), Disney (NYSE:DIS), and EnCana (NYSE:ECA). Oh, and don’t forget World Wrestling Entertainment (NYSE:WWE) on Thursday.

Economically, last week’s reports saw nonfarm payrolls increase by 36,000, which was much less than the 148,000 expected. Private payrolls increased by only 50,000, which is far from the 163,000 expected. Nevertheless, the overall unemployment rate fell from 9.4% in December to 9.0% when it had been expected to increase to 9.5%. Such discrepancies can be confounding. Average hourly earnings made a surprise increase of 0.4%, which is the largest monthly spike since 2008, and could be a harbinger of inflationary pressure. Initial jobless claims for the week ending January 29 totaled 415,000, down from the prior week’s tally of 457,000 and less than expected. The ISM non-manufacturing composite for January climbed to 59.4, which was the best reading since 2005.

Today, December consumer credit was the only item on the economic calendar. It showed an increase of $6.09 billion, which is far more than the $2.50 billion increase that had been expected. This is an unnerving development to me, but the market showed little reaction. For the rest of the week, upcoming economic reports include MBA Mortgage Purchasing Index and crude inventories on Wednesday; weekly initial and continuing jobless claims, wholesale inventories, and Treasury budget on Thursday. Then on Friday we’ll see the Trade Balance and Michigan Consumer Confidence.

Oil prices strengthened early in the week on worries about supply disruptions, but by Friday they were falling, and today they weakened further. The biggest threat from instability in Egypt and the Arabian Gulf is its impact on oil shipments, and in fact all shipping traffic through the Suez Canal. The dollar continues to remain weak, although it bounced off of long-term support early last week.

Market Stats. Looking back at last week, the best cap/style performers were Small and Mid-cap Growth (+3.97% and +3.62%, respectively), and the worst performing cap/style was Small-cap Value (+2.25%), but all caps turned in positive performance. Growth was the best performer within each market cap.

As for sectors, last week’s top sector performers again came in close to what our forward-looking SectorCast model predicted, with Basic Industries and Technology leading the way.

Looking Forward. Basic Industries still appears to have the strongest numbers in our SectorCast model, with Technology and Finance close behind, followed by Energy and Capital Goods.

So, especially given the persistent overbought status of the markets, Sabrient’s models suggest sticking with conservative stocks with strong cash flow and solid growth prospects among companies focused on commodities, energy, and technology. Although the Finance sector continues to score well, too, I am a bit more cautious about these stocks.

4 Stock Ideas for This Market

This week, I again started with the Undervalued Large-Cap Growth preset search in MyStockFinder. I then included Mid and Small Caps because they have been performing so well lately, and up-weighted Technicals and Insider Buying. Here are four intriguing stock ideas worth considering.

Cabot Corp. (CBT) – Basic Industries
Jarden Corp. (JAH) – Basic Industries
EMC Corp (EMC) – Technology
W&T Offshore (WTI) – Energy