Likely Greek Default Worries Markets

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 |  Includes: CMCSA, IYF, ORLY, UNH, V, VGK
by: David Brown

After last week’s stellar performance, the markets dropped into negative territory today, as investors realized that Greece might actually be allowed to default.

Last week saw the markets’ best performance since June and only its second positive week in the past eight. The gains seem to have been based on the mere hope that the potential default of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) could be resolved. Brazil, Russia, India, and China—a group known as the BRICs—were said to be contemplating a possible rescue effort, and the EU finance ministers agreed that something needed to be done. The problem is, of course, that nothing has actually been done. Many now believe that Greece most likely will default, and the looming issue now is how to prevent the domino effect to the other PIIGS and to the entire European zone.

President Obama’s speech this morning was received positively by fellow Democrats, but there seems to be significant resistance from the Boehner camp. No surprise there. The Buffet tax concept seems sensible, I think, to those who are not politicians, but there is little faith that this Congress can accomplish something important. The concept, named for billionaire investor Warren Buffett, would require Americans earning more than $1 million a year to pay at least the same tax rate as middle-class households, no matter how they structure their wealth.

Our economic indicators continue to reflect the worrisome nature of our economy. There were seriously negative reports on the manufacturing sector from the Philly Fed and the Empire State Manufacturing Index. Retails sales were flat, and initial jobless claims rose yet again. The only positive numbers came from industrial production and the Michigan Consumer Sentiment Report, and they were just barely positive.

This week we will learn a lot about the housing market with housing starts and new permits on Tuesday and existing home sales on Wednesday. The initial jobless claims will be watched closely on Thursday, and then on Friday, we’ll see the leading indicators.

Market stats. Leading the market’s performance last week by a small margin was Small-cap Growth, rising +6.2%, but all style-caps did well. The worst performer was Mid-cap Value, which was up + 5%. It’s probably more important to point out that Large-cap Growth continues to lead over the past 1, 3 and 6-month periods, and hence is probably the best place to focus our investing efforts.

It is difficult to judge last week’s sector rotation, as the whole market was skewed by the quadruple witching option expiration day on Friday. But all the talk about possible solutions to the European debt problems had the short sellers rushing to cover, with sector performance ending up almost directly proportionate to each sector’s short interest. Short covering, along with acquisition activity, gave the Technology Sector the lead, up almost +7%, even with disappointing forecasts from Netflix (NASDAQ:NFLX), Research in Motion (RIMM), and Best Buy (NYSE:BBY). Capital Goods was second, with Basic Industries and Public Utilities at the bottom.

Here are the market stats.

Looking Ahead. Our SectorCast algorithm was totally out of line with last week’s actual results. This week’s forward looking numbers continue to favor Basic Industries, Energy, and Finance, but we remain dubious about the Finance sector.

We would recommend that you focus on conservatively priced large-cap growth stocks and consider hedging. Last week we suggested hedging with FXE (Rydex Currency Shares Euro Currency Trust), which tracks the euro’s value against the dollar, and VXX (the iPath S&P 500 Short-Term Futures ETN or “fear index”). We’re expanding our suggestions this week to include VGK (Vanguard European ETF), which tracks stocks from 16 European countries, as recommended by Daniel Sckolnik in his ETF Periscope, and shorting the IYF, ishares for Financial Sector.

4 Stock Ideas for this Market

This week, I started with the Undervalued Large Cap Growth preset search in MyStockFinder. I also included Buys (in addition to Strong Buys) and slightly up-weighted Technicals. Here are four stock ideas that look intriguing in this shaky market:

Visa Inc. (V) – Financial
UnitedHealth (UNH) – Healthcare
Comcast Corp (CMCSA) – Consumer Services
O’Reilly Automotive (ORLY) – Consumer Durables