The Quant View: The Fannie and Freddie Fiasco

By David Brown | August 26, 2008 | 2:13 PM | 0 Comments

With regard to sectors, the market looked very much as it has during bearish weeks of the past six months. Energy clearly led the pack, with materials and utilities close behind, and financials and consumer discretionary trailing. (Note that energy was weak Monday, reversing that one-week correction.)

 

Best and Worst Performance in Sub-Industries

As you would expect from the strength in energy and materials last week, sub-industries were led by coal, gold, metals, mining and fertilizers, while airlines, mortgage finance, and casinos brought up the rear. Most likely, casinos’ bottom position was strictly the result of profit-taking after the group’s phenomenal surge in the past month.

 

Forward-Looking Sector Rankings

In this section, I’m now presenting both the market-cap-weighted and unweighted forward-looking sector rankings. In both rankings, energy leads, with materials as the runner up, although by a much narrower margin in the unweighted rankings. The unweighted financials trail the top three by a narrow margin. Unweighted health care brings up the bottom. In the weighted rankings, information technology claims the bottom position.

What all this means is, if you favor large caps, stick with the weighted rankings. If you’re a small-cap investor, go with the unweighted scores. Mid-cap investors might consider either one or both.

A sharp correction like last week leaves me somewhat cautions with respect to forecasting, but I continue to feel that financials represent a real opportunity in the making. From a fundamentals standpoint, I think energy and materials deserve at least a modest allocation in everyone’s portfolio. Large-cap portfolios might benefit from a small allocation to telecom stocks, while industrials might be considered in small-cap portfolios. Health and information technology probably should be avoided by all for the time being.

 

Stocks to Consider

If you believe as I do that market weakness presents investment opportunities, then let’s ask Qmaxx to identify some stock ideas for the current environment. Here are a few for your consideration:

GMX Resources (NSDQ: GMXR) - Energy
Encore Capital Group (NSDQ: ECPG) - Financials
Myers Industries (NYSE: MYE) – Materials

 

Content excerpted from the 08/26/08 Trader's Talk newsletter.

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