What The Market Wants: Does This Market Have A Pulse?

Includes: ARLP, CBT, PSX, TEVA
by: David Brown

Beginning on last Monday, August 6, the S&P 500 has turned in daily returns of +0.23%, +0.51%, +0.06%, +0.04%, and -0.13%. The average return has been 0.15% per day. Is this thing even alive?

The VIX (S&P 500 Volatility Index) hit a 52-week closing low Monday at 13.70. The market hath neither fear nor pulse. In fact, besides 2008, Monday's VIX close was the lowest since 4/5/2005, almost before VIX began trading in late 2003.

Now, before you mathematicians jump on my back by pointing out that the S&P 500 would make about +38% a year if it duplicated that feat, I admit, it would quite nice but quite boring which I guess is ok. But volume has been about half of its normal summer rate! Basically we are having a seller's strike. Almost no one wants to sell.

Why might that be? Everyone is happy? Doubt that. Everybody thinks things are going to get better? Really! It is probably true that most believe that Europe will find some way out of its mess despite all the false promises and bickering. Probably so.

We will have an election in the USA in November, and after that, things will get better. The first part of that sentence is true. I can't even guess at the second part. But conspiracy theorists will probably say that the FED will definitely implement QE3 or even something better in September to assure the President's re-election. But President George W. Bush appointed Dr. Bernanke in 2006. On the other hand, President Obama re-appointed him in 2009, and they seem to have supported each other since then. Probably a pretty good bet that the Fed will take action if the economic numbers don't pick up soon. And that is a good reason not to sell.

Speaking of economic numbers, we are getting a plethora of new numbers this week and important ones at that. We get Retail Sales today (if same store sales mean anything and they do), and it is likely that this number will be at least ok. The market expects 0.2%, compared to last month's -0.5%. We also get Producer Price Index and Business Inventories today. The former will likely be ok and the latter about a 50/50 chance. On Wednesday, we get Consumer Price Index, Empire Manufacturing, and the very important Industrial Production. There's not too much to worry about with CPI; the market expects the Manufacturing Index to fall down to 5.0 from 7.4 last month and Industrial Production to be up to 0.6% from 0.4%. The latter is most important! Thursday, we get Initial Jobless Claims which is expected to be at 368K, up a tad from last week. Friday, we get Housing Starts and Building Permits and both are expected to be a tad better. We also get the Philly Fed, Michigan Sentiment, and LEI. The Philly Fed is expected to be negative at -5.0 but improved from last month's -12.9. Sentiment is expected to drop a smidgen to 72.2 from 72.3, and LEI is expected to be better at 0.2%, up from -0.3%. LEI is rarely much of a surprise since several components are already known, but the Philly Fed and Michigan Sentiment can both move markets.

But I'm not sure we can lose here. If the numbers are great we will probably move somewhat higher. If they are terrible, we may move in higher since the Fed would almost have to act decisively in September. If so-so numbers materialize, we will likely continue with our very weak pulse, volume, and volatility.

So, since Mid-cap Value led last week's style cap at +2.09 and Large Cap Value led all time periods going back a year (see the stats), value choices among the larger caps are probably preferred by the market. The Financials sector led last week and despite the attractive prices the prices, minefields remain among large banks. I would opt for Healthcare (not HCA), Industrials and Technology. If you disagree with our thinking, by all means consider hedging with your favorite form of the VIX. At a 7-year low, how can you go wrong?

Here are the market stats.

4 Stock Ideas for this Market

This week, I created a custom search, including all large-caps with an emphasis on value. Here are four you may find interesting:

Phillips 66 (NYSE:PSX) - Energy

Cabot Corp. (NYSE:CBT) - Basic Materials

Alliance Resource Partners LP (NASDAQ:ARLP)- Energy

Teva Pharmaceuticals Industries Limited (NYSE:TEVA) - Healthcare

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.