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What the Market Wants: Market Rally Continues But Not Sure Why…

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Courtesy of David Brown, Chief Market Strategist, Sabrient

After a down-day on Friday, the market resumed its upward trend today and stormed ahead more than 3%.  Volume was less than normal due to the Columbus Day holiday for the bond market.  Today’s impetus seems to have come from more positive hints from the German chancellor and the French president about the European debt situation.  That cloud will continue to hang over the market until they stop hinting and take some clear action to resolve the situation.

Also contributing to the positive atmosphere was the lack of any negative reports out of our own government.  Almost without exception, last week’s economic releases met or very slightly exceeded expectations over the past week.  This week we have a paucity of major economic news on tap: initial jobless claims, international trade, and the Treasury budget on Thursday; retail sales, trade balance, consumer sentiment and business inventories on Friday. The FOMC minutes from the September 21st meeting come out on Wednesday, but we heard a lot after the actual meeting, so it’s doubtful there will be any surprises.

Here are the market stats.

Market stats.  All cap/styles were in positive territory last week. Leading was Mid-cap Growth, up +2.6%; lagging was Small-cap Value, up +1.3%. Large-cap Growth came in second, but maintained its leadership over the last 3, 6, and 12 months. It is probably still your safest bet.

Caution: Please note that we are temporarily suspending our sector evaluation.  We use the Thomson Reuters sector classifications, and they have just finalized and introduced the new Thomas Reuters Business Classifications (TRBC)—which contains 10 sectors compared with the previous 11 plus one undesignated group.  We are in the process of converting our sector constituents to match the new TRBC sectors, but this has not gone as smoothly as we would have hoped.  We should resume our sector evaluation in a week or two.

Looking forward. Valuations continue to look quite reasonable, compared to the highs in May, as do net upward revisions by analysts, going forward.  The third quarter earnings season started today, and our indicator on positive reports is better than usual. Certain bellwether stocks will be watched closely to gauge the future of their respective industries—namely, Alcoa (AA) on Tuesday, and on Thursday, Google (GOOG) and JP Morgan (JPM).

So if you believe the market is trying to penetrate recent resistance at 1220, I would be looking at large-cap and mid-cap growth stocks in Basic Industries, Energy, Technology and Health Care. Finance continues to be an area where caution should prevail, as does Consumer Durables.

4 Stock Ideas for this Market

This week, I started with the Undervalued Large Cap Growth preset search in MyStockFinder (http://MyStockFinder.com). I also included Buys (in addition to Strong Buys), mid-caps and slightly up-weighted Fundamentals. Here are four stock ideas that look intriguing:

Apple Inc. (AAPL) – Technology
United Therapeutics Corp. (UTHR) – Health Care
Reliance Steel & Aluminum Co. (RS) – Basic Industries
CVR Energy, Inc. (CVI) – Energy

Until next week,

David Brown


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