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What the Market Wants: The Devil You Know

Courtesy of David Brown, Sabrient Systems and Gradient Analytics

Lately we’ve been able to reduce the one thing the market does not want: uncertainty. With all due respect President Obama and Governor Romney, “the devil you know is better than the devil you don’t know.” Check off one big uncertainty. 

Third quarter earnings can be just about checked off.  Not quite as good as the first two quarters, especially on the revenue side, but definitely better than most expected. 

Europe caused the market some grief last week with lowered GDP for just about all Eurozone participants, including Germany, which was the biggest surprise when their expected growth in 2012 was lowered from 0.8% to 0.3%. Unlike six months ago, they now have President Draghi’s innovative bond buying plan.  China is taking steps to halt their slowing growth as a new administration is appointed in the next week. Less uncertainty.

Sandy’s fierceness is over, but the clean-up will take months if not years.  We grieve for those who lost loved ones or property in the storm, but the economy, while potentially facing a shortfall in Q4, will likely see increased numbers next year due to rebuilding of infrastructure and replacement of personal property and possessions.

Then there is the “fiscal cliff.”  Anyone who paid attention to the elections knows that the citizens of this country will be closely watching how this key Congressional battle gets resolved. We cannot imagine a lack of solutions to this dilemma.  Parts of it may get kicked down the road, but I would wager that those making in excess of $250,000 better start planning on paying a higher capital gains tax. That simple fact probably explains much of Apple’s weakness last week and weakness in other strong stocks over the past few years.

We believe selective buying of small- and mid-cap stocks in the Healthcare, Energy, and Financial sectors along with Housing industry (see last week’s sector analysis) would be prudent for investors.  As usual, we strive to find undervalued companies with strong growth potential.  Hedge with either VIX or European related index puts.

Here are the market stats.

3 Stock Ideas for this Market

This week, I created in a custom search in MyStockFinder focused on value, growth, momentum and technical strength. Here are three you may find interesting:

AMN Healthcare Services, Inc. (AHS) — Healthcare

Flagstar Bancorp, Inc. (FBC)—Financial

Cardinal Financial Corp (CFNL)—Financial 

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


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