What The Market Wants: More Waiting

Includes: CTB, EPL, GCOM, MCK
by: David Brown

September's first trading day opened flat but later gave way to volatility as the market retreated rather sharply on the heels of slightly weak economic data. Manufacturing ISM fell further below the neutral line of 50, to 49.6, despite forecasts that it would move ahead to 50 after last month's tepid 49.8 reading. That makes three consecutive down months for manufacturing.

The market's downward momentum accelerated with the announcement that Construction Spending fell -0.9 %, much worse than the expected growth of +0.5% and last month's growth of +0.4%. Fortunately, Motor Vehicle Sales late in the day helped continue a rally begun by Apple's invitations to an anticipated showcasing on September 12 of iPhone 5. Auto sales were up +6.4% year-over-year and truck sales higher by a similar amount.

The market rallied into positive territory late in the day before succumbing to concerns about this week's ECB meeting and whether or not President Draghi can sell his three-year sovereign debt purchases to assist Greece, Spain, and Italy. That meeting will be followed, about a week later, by the September Fed meeting which, hopefully, will reveal whether QE3 is ready for primetime or simply another tease from Bernanke. All of this uncertainty, coupled with our Presidential election and dysfunctional Congress, are likely to keep equity buyers on the sidelines.

Our opinion is that current equity prices are reasonable, if not a tad on the cheap side, unless of course none of the above action items turn out positive for investors. The U.S. economy could probably survive without QE3; however, Draghi's task is of particular concern. The amount of European sovereign debt held by banks could be disastrous if Greece, Spain, and Italy collapse. A decline in the euro would lead to downward EPS revisions in U.S. equities and place them on an overvalued shelf.

With so few alternatives, sellers are likely to be timid. Bond yields are so low that the downside risk is great if interest rates were to rise. Real estate is risky, precious minerals are expensive, and currency is a dangerous game to trade. The picture for equities remains the most enticing, unless no one acts to get world economies moving ahead faster.

Here are the market stats.

4 Stock Ideas for this Market

This week, I picked stocks with strong GARP characteristics in the sectors and market caps favored in Sabrient's Market Stats, namely Cyclicals and Small-caps. Here are four you may find interesting, including two small-caps and one cyclical Consumer:

  • Globecomm Systems, Inc. (GCOM)-Technology

  • Energy Partners Ltd. (EPL) - Energy

  • McKesson Corporation (MCK)-Healthcare

  • Cooper Tire & Rubber Co. (CTB)-Cyclical Consumer

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.