What the Market Wants: Banks are the Market’s Ball-and-Chain

Reminder: Sabrient is available to chat with Members, comments are found below each post.

Courtesy of David Brown, Chief Market Strategist, Sabrient

The market was not a pretty sight today, but it ended a lot more attractive than at midday when the S&P 500 was down 21 points. In the end, the S&P 500 lost 10.7 points (-0.81%) to close at 1305.44, holding important support at 1300.

Much of the damage was in the Financial Sector, which lost nearly 2% today, as it continued to be pummeled by the bank meltdown in Europe. European sovereign debt populates the balance sheets of major banks, which aren’t required to carry assets as mark-to-market. Instead, assets are valued at what the banks paid for them, not what they’re selling for today. That’s like valuing CSCO at $77, its peak in 2000, rather than the current price of $15.44. So banks have failed stress tests right and left.

Also weighing on the market is our own debt crisis, as our dysfunctional Congress struggles toward the only viable solution, raising the debt ceiling. We remain confident that will happen, but will the market like it? That’s the 64 BILLION dollar question!

Meanwhile, other market forces had little effect today. Oil was up about 0.5%; the dollar down about 0.3%, and the only economic report of interest was the housing market index. Today’s reading of 15 was two points higher than the prior reading but still shows a depressed industry. (We’ll learn more about the housing industry with reports on housing starts/building permits on Tuesday and existing home sales on Wednesday.)

Corporate earnings could have an impact, but so far they’ve done little to help the overall market. Last week Google (GOOG), JP Morgan (JPM), and Citibank (C) handily beat estimates, and each stock got an immediate bounce but only Google held on to it. JPM and Citibank both took it on the chin with today’s bank pummeling. IBM announced today that its earnings increased by 8%, and it raised guidance for the rest of the year. The stock was up almost 2% in after-hours trading. Let’s see if they hang on to it tomorrow.

Not all corporate earnings were stellar. Cubist Pharmaceuticals (CBST) missed its earnings by 190%! (It was expected to make $+0.42 butlost $-0.34). Progressive Corp (PGR) missed its earnings by 10%. CBST dropped 3% today, while PGR dropped -0.45% and another -0.46% in after-hours trading.

Market Stats. Last week, the market didn’t care much for anybody. All cap/styles were down more than -2%, except for Large-cap Growth, which lost “only” -1.8%. Small-cap Growth was the worst, down almost 3%, and small-caps and mid-caps in general were the most disliked, as market gave large caps the “best of the worst” award. In every market cap, growth did a little better than value.

Here are the market stats.

Sector performance was a classic flight to safety, with Consumer Non-durables, Health Care, and Public Utilities in the top four, following Energy which claimed the top spot with a loss of just -0.77%. Our SectorCast got four of the top five right (Energy, Health Care, Utilities, and Basic Industries).

Bringing up the bottom of the performance rankings were Capital Goods, Finance, and Transportation, each losing more than –3.5%.

Looking forward, the Sabrient SectorCast projects that Basic Industries, Energy, and Health Care will continue to dominate sector performance, while Finance, Transportation, and Consumer-anything will languish at the bottom.

The market’s near-term future appears murky, given the uncertainty that abounds globally and within our own economy and government. But it could be that corporate America will continue to carry the day with healthy profits and their hordes of cash.

Look for a bunch of heavy hitters in this week’s earnings announcements: Apple (AAPL), Bank of America (BAC), Coca Cola (KO), Goldman Sachs (GS), and Yahoo! Inc. (YHOO) on Tuesday; Intel (INTC) on Wednesday; Advanced Micro Devices (AMD), AT&T (T), and Microsoft (MSFT) on Thursday; and Caterpillar (CAT) and General Electric (GE) on Friday. These results may well determine the near-term fate of the market.

Below are the scheduled economic releases for the rest of the week. Looks like the emphasis is on the housing industry.

4 Stock Ideas for this Market

This week, I started with the GARP (Growth At a Reasonable Price) preset search in MyStockFinder (http://MyStockFinder.com). I also included Buys (in addition to Strong Buys) and slightly up-weighted Long-Term Technicals. Here are four solid stock ideas with reasonable valuations, all small caps:

Metropolitan Health Networks (MDF) – Healthcare
Newmont Mining (NEM) – Basic Industries
Hollysys Automation Technologies (HOLI) – Technology
Caribou Coffee (CBOU) – Consumer Non-durables

Until next week,

David Brown
 

Full disclosure: The author does not hold any of the stocks mentioned in this week’s “Stock Ideas.”