What The Market Wants: Turnabout

Last week was horrible, while yesterday was quite good, albeit on low volume. What happened?  Let’s review the facts:

Last week, the S&P 500 dropped over -4% to close Friday at the key support at 1295, off nearly -8% from its April high. Mid-cap Growth was the worst style/cap, down -6.2%. The best was Large-cap Value, off -4.3%.

One of yesterday’s stimulants was the developing consensus that European nations will do what they must to keep the Eurozone intact. That’s one looming problem that, hopefully, has been resolved. Additionally, China gave indications that it might moderate its policies due to slower growth–another positive. Options expired on Friday, so that creator of volatility is out of the way for another month.

Economic Releases. Most of last week’s economic reports were a little below expectations, although the most important in our view, Industrial Production, was sharply up from a loss of -0.6% to an unexpected gain of +1.1%. This week is sparsely populated with corporate and economic reports. We do get several housing reports along the Durable Goods Orders and the Final Michigan Sentiment. These releases could continue to hint at small but steady improvements in domestic growth which have kept the market in a positive direction since last fall, not counting the recent six weeks of flat behavior followed by the sharp nearly -8% drop of the past two weeks.

In other words, the support at 1295 could hold due to a continuation of steady but modest growth in the domestic economy, further bolstered by an improving attitude towards Europe and China.

Market Stats. Among the sectors, last week was clearly a classic “flight-to-safety” week led by Utilities, Non-Cyclicals, and Healthcare. Yesterday was a complete turnabout with the dollar and gold down, oil up, and Treasuries down. Basic Materials led the way yesterday among sectors (up more than +3%) followed by classic growth sectors:  Technology (led by Apple's (AAPL) +6% gain) and Energy. Financials were dismal last week and didn’t fare much better yesterday as JP Morgan’s (JPM) woes continued to push financials away from leadership. Facebook (FB) surprised millions of investors by losing more than 11% of their Friday market debut on huge volume.

Risk remains high until the financial problems of European sovereign debt are resolved, China has clear direction, and our own government’s debt and leadership issues are resolved.  All of that could require more patience then the markets have to offer.  Nevertheless, valuations remain quite attractive, especially after the recent 8% market drop.  Continued corporate earnings improvements could keep the markets focused on the upside in light of unattractive alternatives.

4 Stock Ideas for this Market

Here are four stocks you may find interesting this week:

AGCO Corporation (AGCO)-Industrials
Herbalife Ltd. (HLF) - Non-Cyclical Consumer
The Allstate Corporation (ALL)-Financials
CVR Energy, Inc. (CVI)-Energy

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

Disclaimer: This newsletter is published 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.