Dog Days of Summer Drawing to a Close

Includes: AEGN, HES, HMN, XRTX
by: David Brown

The low-volume “dog days of summer” have been anything but uneventful. Rather than a sleeping dog, this summer has been more like a rabid dog—gyrating wildly and scaring the heck out of everyone in its path.

Last week was no different. About the only thing good we can say about it is that the rally on Friday recaptured most, but not all, of the week’s losses. The week ended with three of the four major indexes down: the S&P 500 (-0.7%), the Dow, (-0.6%), and the Nasdaq (-1.2%). Only the Russell 2000 was up, +1.0%.

Despite Friday’s rally, the week was replete with bad news, especially on the housing front. Existing home sales fell dramatically, more than 27%, and new home sales declined to 276,000 versus a predicted 334,000. (The consensus writers might want to sharpen their pencils.) The rally was even more bizarre when you consider that the second quarter GDP was revised downward a full 33%—from 2.4% to 1.6%. Apparently, the market was peering under every rock for signs of encouragement and chose to compare the 1.6% number with the 1.4% that some had expected. But it’s hard to find joy in a stock rally based on a negative reality.

It is increasingly difficult to find actual support that the economy is recovering, when reality points toward a double-dip recession. Corporate America, flush with record levels of cash, might make it happen with renewed M&A activity. BHP’s (NYSE:BHP) substantial offer to buy Potash (POT) led the M&A action (could it be they misunderstood what POT stands for?). Dell (DELL) and Hewlett-Packard (NYSE:HPQ) quibbled over who will make the best offer for data storage company 3Par (NYSE:PAR). In a buying mood, Intel (NASDAQ:INTC) announced a couple of acquisitions but at the same time lowered its Q3 revenue guidance below what had been expected.

But M&A can’t do it alone. Some thought that Chairman Bernanke’s speech on Friday could turn things around — he expects growth to pick up in 2011 and said that the Fed will use “unconventional measures if it proves necessary . . .” to help it along. But the bottom line is that the market is still heading south, despite the slightly positive economic news today, Monday, which saw personal spending rising more than expected, to +0 .4%, against a flat to slightly-lower-than-expected personal income. The S&P 500 closed today at 1048.9, down 1.47%.

In the past few weeks the S&P 500 has found technical support at 1040 on several occasions, but whether or not that support will hold probably depends on this week’s remaining economic news. Some fairly important indicators will bring the month to a close. On Tuesday, we have the consumer confidence and Chicago PMI reports; on Wednesday, construction spending and auto and truck sales; on Thursday, factory orders and the weekly initial jobless claims; and on Friday, the all-important unemployment report which will reveal how many of us can celebrate Labor Day with a job. If this market is to turn around and head in the other direction, that unemployment number better be good.

Market Stats. The weekly market stats will not be included this week. Sabrient is undergoing a substantial data upgrade that will in the long run provide a full set of international data for the company’s various products and services. However, the upgrade process is causing a glitch here and there, one of which is in our weekly market stats. I can tell you though that there was barely any difference between growth and value performance last week and that the market preferred small caps over large.

4 Stock Ideas for this Market

This week, I used Sabrient’s GARP (Growth at a Reasonable Price) preset search on MyStockFinder. Here are 4 stock ideas to consider from the highest ranked sectors:

Horace Mann Educators Corp (NYSE: HMN) – Financials
Xyratex Ltd. (Nasdaq: XRTX) – InfoTech
Insituform Technologies (Nasdaq: INSU) – Industrials
Hess Corp (NYSE: HES) – Energy