What The Market Wants: Stability In Europe And Stronger Earnings Needed

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 |  Includes: CEO, CPX, CYOU, MNTA
by: David Brown

It’s a very tough call to ascertain what the market wants this week. Clearly, the market was dismayed by the unexpected downgrade to France’s credit rating on top of the handful of other downgrades that were not such a surprise. Recall that Fitch analysts had predicted earlier last week that France would keep its top-notch AAA+ rating. While the market was spooked Friday, not all of the gains from earlier in the week were wiped out.

Yesterday's market opened strong despite unsettling news from Europe over the extended weekend. The Empire State reading on manufacturing was up sharply to 13.5, well above an expected reading of 10 and last month’s report of 8.2. Nonetheless, the market steadily eroded late morning to nearly reach break-even before a small rally brought us a close of 1293.6 yesterday. Once again the market resisted a break of 1300, despite hitting a high of 1303, and, for the umpteenth time, failed to close above 1294.

Early earnings reports have been generally worse than expected, with JP Morgan (NYSE:JPM) leading expected weakness in the financial sector with disappointing quarterly results. This followed Alcoa’s (NYSE:AA) earnings miss last week. A negative reversal in initial jobless claims to nearly 400,000 didn’t help matters, nor did much worse-than-expected retail sales for December (sales less autos fell 0.2% versus an expected gain of 0.3%). On the other hand, the week’s market gains were probably saved only by the Michigan Consumer Sentiment rising to 74.0 from an expected 71.2 and last month’s 69.9.

Market Stats. Small-cap Growth led the cap/styles rising +2.3% on the week while Large-cap Growth was the worst at a gain of +0.9%. For the past month, there hasn’t been a significant difference among cap/styles, other than a slight bias toward Small Caps, as you will see in our market stats.

Here are the market stats.

The bottom line is that the situation in Europe must reach a more stable point and corporate earnings need to do much better or the market is likely to remain listless, trading in the range between 1120 and 1295. This week’s economic releases will focus on inflation readings where little change is likely or a number of home sales numbers that could possibly, but not likely, bring more favorable focus to the forsaken construction industry. One other possibility would be a strong industrial production report tomorrow. Caution is urged with emphasis on strong GARP stocks and a hedge as suggested by Daniel Sckolnik’s ETF Periscope article from this morning.

Four Stock Ideas for This Market

This week, I used the GARP (growth at a reasonable price) preset search in MyStockFinder. I also included Buys, in addition to Strong Buys. Here are four stock ideas that look intriguing:

Changyou.com Ltd (NASDAQ:CYOU) – Cyclical Consumer
Complete Production Services Inc. (NYSE:CPX) – Energy
Momenta Pharmaceuticals Inc. (NASDAQ:MNTA) - Healthcare
CNOOC Ltd (NYSE:CEO) - Energy