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Another down week for the stock market as it tumbled 1.2% and 3% on the S&P and NASDAQ respectively. Declines were broad-based as only the Healthcare sector rose over the past 5 days. The NASDAQ fell more sharply than the overall market, with the largest declines on Wednesday of last week.

The main catalysts remain surging oil prices, the struggling financial sector and concern over a weak economy. Overall the market has lost 14% YTD and the S&P 500 has lost nearly 20% since highs hit in October. We sense that the investor gloom index (if there were one) hit new highs last week. Unfortunately, we suspect things will likely get gloomier before getting better.

On the economic front, oil futures climbed to new records again last week which continues to pressure stocks. Oil is clearly having a significant impact on the direction of the market, and we do not see signs of this trend reversing anytime soon. However, manufacturing activity expanded in June - just barely, although the ISM services index showed contraction and came in lower than expected. Construction spending also showed declines, but did beat expectations. On a positive note, non-residential construction increased, suggesting business investment was expanding. Unemployment rose, non-farm payrolls declined and jobless claims increased. All three indicators were slightly worse than expected, and in our view clearly show a struggling economy that will likely continue for some time.

Clearly the market trend has not been promising for investors on the long side of the market. The economy is still very weak and we do not yet see any factors developing that will help reverse those trends over the near term and do not think the stimulus package is enough by itself. Housing remains a big concern and rising energy and commodity prices continue to be a drag on the market. The second quarter reporting season again will likely be difficult for the financial sector and a boost from rate cuts is unlikely given inflation concerns and the weak dollar. We do not mean to sound only the 'gloom and doom' alarm but at the same time we just think that it is unlikely these trends will change over the short term.

As a result, remains concerned with the overall direction of the market and the risk over a potential meltdown. At best, the market may move sideways for the rest of this year. In light of our market view, we are going to temporarily tweak our sell rules by taking our gains quicker and holding our cash longer.

For those that have cash to invest, the following stocks are currently showing on our watch list: 

  • The Laclede Group, Inc. (NYSE:LG) - Natural Gas
  • PHI Inc. (NASDAQ:PHII) - Oil Well Services
  • NCI Inc. (NASDAQ:NCIT) - Computer Services does not currently own any of these stocks at the time of this writing, but we may choose to buy one or more of these stocks over the very near term. All of these stocks have been strong performers under very difficult market conditions.

Disclosure: None