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Monday’s market confounded me about as much as last week’s flight to risk. Monday, in the face of disappointing economic news on personal income and spending, the Dow and the S&P 500 gained almost 1% while the Nasdaq gained 1.3%.

No doubt Monday’s optimism was spurred by the European Union’s proposed bailout of Greece and the White House’s announcement of a possible “significant” deal on the national debt, along with a carry-over glow from President Obama’s gift of oil reserves last week. But the Greek bailout is not a done deal; our stubborn Congress has yet to approve any solution on the national debt; and tapping oil reserves to lower gas prices is a temporary measure at best.

But hey! Any sliver of good news is fuel for the market in its current mood.

Last week’s market behavior, though, was truly confounding. All three major indices rose on Monday and rose again, big-time, on Tuesday. Then they settled down to mostly small losses as disappointment hit on Wednesday when Chairman Bernanke delivered an inconsequential speech after setting everyone up for a “major” (and unusual) press conference. That was followed by more disappointment on the employment front with the rise of initial jobless claims to 429,000 from last month’s 420,000.

The only decent economic news came on Friday with the durable goods report (up +1.9% against a consensus estimate of +1.5% and last month’s -2.7%). Yet the week ended on a positive note for most of the indices. The biggest gains were made by the Nasdaq and the Russell 2000, as investors loaded up on small-caps and concentrated on growth stocks in all three caps.

Small caps and growth stocks have inherently higher risk than value stocks and larger caps. Thus, the “flight to risk.”

Market stats. The cap/style table clearly shows last week’s dominance by growth and small-caps. Small-cap growth led by a healthy margin (+3%), with small caps in general the second best cap/style (+2.2%). But even in the larger caps, growth dominated the styles. Mid-cap Growth was up +1.6% and Large-cap Growth, +0.4%.

Click here to see the market stats.

The flight to risk was obvious in the sectors as well. Consumer Durables led the week, up +2.5%, even though the positive durable goods report didn’t appear until Friday. Basic Industries was No. 2, which is more or less in line with the projections of our forward-looking Sectorcast over the past several months.

Transportation came in third, buoyed temporarily by “cheap oil.” And guess which sectors clustered in the bottom half of the group? Yep. The usual safe havens of Utilities, Health Care, and Consumer Non-durables.

Energy sunk to No. 9, reflecting the lower oil prices from the President’s gift. Finance was dead last, down -1.0%, reacting to the reality of global financial risk. Yet, to confound things further, Finance led the sector performance today.

Looking forward, our SectorCast (which operates on “just the numbers, ma’am”) continues to put Basic Industries at the top, along with Health Care and Energy (Energy was probably oversold last week). At the bottom, where they probably belong, are Finance, Consumer Durables, and Transportation.

With July upon us, we’re entering the dog days of summer. That was reflected in the low volume today’s markets. But who knows? Maybe this week’s numbers on consumer confidence, initial jobless claims, and business conditions in the Chicago area (via the Chicago PMI) will bring more rationality to the markets.

4 Stock Ideas for this Market

This week, I started with the Undervalued Large Cap Growth preset search in MyStockFinder. I then included Buys (in addition to Strong Buys) as well as Small and Mid Caps, and slightly upweighted Long-Term Technicals, Analyst Upgrades, and Insider Buying. Here are four stock ideas worth considering:

Walter Energy (NYSE:WLT) – Energy
SciClone Pharmaceuticals (NASDAQ:SCLN) – Healthcare
Amtech Systems (NASDAQ:ASYS) – Technology
DIRECTV (NASDAQ:DTV) – Consumer Services

Source: What the Market Wants: A Flight to Risk