What The Market Wants: June Gloom

Includes: AIG, FOSL, GNW, PBI
by: David Brown

Today, the market sold off as much as a full percent before recovering to a slight loss at the close. At midday, it was off more than 10% from its high in April despite the solid quarterly earnings added in Q1. Factory Orders (-0.6%) were well below the expected number (+0.1%), continuing a worrisome trend that began last week when every major economic number disappointed: Consumer Confidence, Initial Jobless Claims, GDP 1st qtr. (the 2nd revision), Chicago PMI, Payroll Numbers, Unemployment, Personal Income, and Construction Spending! While none were huge disappointments, they were all worse than expected. I can’t recall such a clean sweep. Of course, the market did not like that, especially in light of continued deterioration in Greece, Spain, and in fact Europe in general.

Furthermore, rumors are hinting at an unexpected aggressive settlement to the European crisis, and other rumors are hinting that the poor employment data will push the Fed to implement some form of QE3. If so, it is likely that on solid news the market could recover much of this loss. Support for the S&P 500 remains close at 1260; a breach of that support level would be serious.

A careful examination of the week’s returns by stocks will show you that it was clearly a wave of profit taking. In general, the more you had been up, the more you lost. Stocks that had done poorly this year fared much better. Obviously, all companies that had fared well during the year did not suddenly stop making profits, especially since there were no significant announcements from such corporations warning of dire future quarters. Nor were they generally overvalued. Consider Seagate (NASDAQ:STX), down 17% for the week; it is selling at 5 times trailing earnings and 2.34 times the year’s estimated earnings ending June 30, 2013. Today, STX was up +1.84% bringing some rationality back to the scene.

China reported a disappointing PMI overnight, but last week’s rumor that the Chinese government would undertake significant infrastructure projects to stabilize its falling economic growth proved to be a counterweight. So if the rumors come to fruition, this could be a solid buying opportunity.

Here are the market stats.

Market Stats. Large-cap Value was the star style/cap losing -2.9% on the week. Mid-cap Growth was the worst, losing -4.3%. Even utilities were down for the week, leading the sectors at -0.6%. Energy fared the worst, losing -3.94%. Our forward looking sector model favors Healthcare, Industrials, and Basic Materials, all of which would benefit from an improvement in the dour outlook which has pushed global markets down significantly. It may still be valuable to retain a put on EWP which has benefited us greatly over the past several months. It did rebound sharply today, but that makes the hedge that more valuable.

4 Stock Ideas for this Market

This week, I used the Insider Buying preset search in MyStockFinder. Here are four stocks you may find interesting:

Genworth Financial Inc. (GNW)—Financials
Fossil, Inc. (FOSL) — Cyclical Consumer
Pitney Bowes Inc. (PBI)—Technology
American International Group Inc. (AIG)—Financials

Disclosure: The author does not hold positions in any of the stocks mentioned in this article.

Disclaimer: This is solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

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