What The Market Wants: It's A Conundrum

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Includes: AAP, CIG, PMT, PRU, VXX
by: David Brown

Today was a puzzling way to begin our new week: a brisk positive start gave way to the Dow’s inability to penetrate 13,000 for the first time in nearly four years. A plethora of positive economic news last week, corporate earnings surprises to the upside, and a likely final deal with Greece had the market creeping upward today, ready to push the Dow over that important barrier and set another new 11+ year high for the Nasdaq. But alas, it didn’t happen. Was it because Walmart’s (NYSE:WMT) quarter was weak? Was it simply that technicians were unwilling to support the Dow’s move over 13,000? (Unlikely, since the weakest market was the Nasdaq). Or did it have nothing to do with either?

Let me expand on last week’s news. The steep drop in new unemployment claims was a 4-year low. Very good news! The Philly Fed and Empire Manufacturing numbers were both positive surprises. Housing starts hit a three-year high. Corporate positive surprises such as Met Life (NYSE:MET) and John Deere (NYSE:DE) and a number of others offered additional reasons to believe the economy was indeed creeping ahead.

As we mentioned last week, valuations on the Sabrient GARP 1000 were closer to lows than highs. Where else can money go? Government bonds ... but that’s a bad risk/reward ratio on the long side, especially with core inflation numbers rising last week and no reward on the short side. Corporate debt is a little better but with risk/reward issues. Precious metals are in the stratosphere. Real estate is just a bad word. Yet, we didn’t grab the positive Greek news and rush into the market.

Here’s the other side. The Greek tragedy and the PIIGS problems are far from resolved. Iran continues to rattle its sword. Industrial production was up 0% last week, a disappointment. The Leading Economic Indicators (LEI) were on the disappointing side. Retail sales were disappointing. A few companies didn’t fare so well with their earnings reports like Walmart today, General Motors (NYSE:GM), Marriott (NYSE:MAR), and others last week. Furthermore, there was very little enthusiasm for any of our wannabe Presidential candidates. Congress has the lowest approval ratings in history. Africa, Pakistan, the Middle East, Russia, North Korea. Worry, worry, everywhere we look. Frankly, there is a lack of leadership in the market or anywhere else.

But corporate America does have leadership and tons of cash. Growing profits. Reasonable prices. Perhaps it’s the place to be!

Not much coming from new economic or corporate reports this week. We have existing home sales tomorrow (not much there); new jobless claims Thursday (could be more good news or NOT); new home sales on Friday (which could drive the construction stocks one way or the other); and last of all, the final Michigan Consumer Sentiment reading (unlikely to get much from that).

It’s a true conundrum. Tomorrow could be a tipping point: a technically inspired crash or at least pullback; or a rational resumption of the accumulation of attractive companies—especially if they are paying dividends that are likely to grow. That is our choice, together with even more hedges: VXX, and shorting weak companies that still sell for lots of bucks? Take your pick. Assuming you don’t want to stay on the sidelines, here are a few long ideas.

Here are the market stats.

4 Stock Ideas for this Market

This week, I created a custom search with MyStockFinder, emphasizing high value, high growth, high earnings quality, momentum and high dividend yield. Here are four stock ideas for your consideration:

Advance Auto Parts, Inc. (AAP) – Cyclical Consumer
Companhia Energetica de Minas Gerais (CIG) – Utilities
Prudential Financial Inc. (PRU)—Financials
PennyMac Mortgage Investment Trust (PMT)—Financials