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What the Market Wants: From Roses to Thorns

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Courtesy of David Brown, Chief Market Strategist, Sabrient

Last week things looked rosy for the markets, after the European bailout fund was finally ratified by the last holdout, Slovakia, just 10 days before the October 23 EU summit.

Giddy with high hope, the market had its strongest week since July 2009. The S&P 500 closed above 1220 (at 1224), finally breaking out of its almost three-month trading range.  Hints of a trillion-dollar euro-zone bailout added to the euphoria.

Here are the market stats.

Market Stats. In one week, we went from a jubilant market, the antithesis of flight to safety, to today’s demonstration of a classic flight to safety. Last week was led by small caps, and Small-cap Growth in particular (+9.1%), while Large-cap Value, the safest of the safe havens, brought up the rear with a very respectable +5.6% gain for the week.

Then the weekend came, with Germany raining all over the parade.

Finance Minister Wolfgang Schaeuble dampened hopes that anything definitive would come out of the EU, which was seconded this morning by Chancellor Merkel’s spokesman, Steffen Seibert.  Today’s economic reports didn’t help much either.  The Empire State Manufacturing Index came in at -8.48, which was slightly better than last month but far below the expected -3.25.   Industrial production was unchanged. These economic announcements continued last few weeks’ theme of mildly negative to slightly positive numbers.

Adding to the negative mood were the Occupy Wall Street protests, which spread around the globe.  Nobody, it seems, likes the banks.  Adding insult to injury, JP Morgan Chase (JPM), arguably one of the best of the banks, reported earnings that were well below estimates, which casts a shadow across the whole banking industry.

Today the S&P 500 Index lost almost 2% to close at 1200.  We’re now back in the 1120-1220 trading range, where we’ve been for the past three months. It is interesting to note that during these three months we had just one day when the S&P closed below the 1120 line and one day when it closed above the 1220 line.

Looking Forward. Looking at the big picture, the forward looking P/E (PPE) of our top 100 stocks is now 7.15, which is still well below the May figure of 8.23, and our discounted current–quarter expected earnings value is nearly 75% higher than it was in the May figure.  So all is not lost–IF Congress would just behave, IF banks would do what banks are supposed to do, and IF somebody, anybody, would provide some leadership for all this.

Clearly, it is a time for caution. Since cash is earning next to nothing these days, hedging seems to be our best bet.

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, small-caps and slightly up-weighted Fundamentals. Here are four stock ideas that look intriguing:

Note: I’ve included two Public Utilities and leave you the choice between a smaller but potentially higher growth stock (IRDM) and a larger company that pays an 11% dividend (TEO).

Telecom Argentina S A (TEO) – Public Utilities
Iridium Communications (IRDM) – Public Utilities
ARGO Corporation (ARGO) – Capital Goods
Iconix Brand Group, Inc. (ICON) – Consumer Non-durables
CIGNA Corporation (CI) –Health Care

Until next week,

David Brown


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