The Quant View: Market Burns Ahead

Like the large fire we had here in Santa Barbara last week, the market continues to burn ahead, oblivious to pockets of uncertainty and fueled by the winds of profits that can at times cause fearless investor behavior. I'm not saying this won't continue, but I am surprised that the leading sector last week was Financials, up a startling 18% for the week, despite what I thought were unpleasant results from a number of the bank stress tests.

According to our Sabrient forward-looking sector ranks, the Financial Sector is now fully valued in light of its current and year-ahead prospects. Considering the potential for serious capital raise requirements and still-looming issues about commercial real estate loans and credit card debt, it seems overly optimistic to be placing full valuation on the Financial Sector.

Despite this note of concern, the market had an excellent week across all style/caps, from a low of 3.2% for Large-cap Growth to a high of 8.7% for Large-cap Value (including the banks). The one-month numbers remain very solid, with double-digits for nearly every style/cap, led by Small-cap Value at 17%. The good news is spread around, as the three-month numbers are also quite robust, led by Mid-caps, with an approximate 12% return.

There's plenty of cash on the sidelines to fuel this market, and short covering is playing no small part in the advance. As you can see from our forward- looking sectors below, valuations in Telecom, Health Care and Energy remain quite attractive, both in the near term (Telecom) and the mid and long term (Energy and Health Care).

From a purely valuation viewpoint, only the Tech Sector and Financials are looking toppy. Of course, any confidence that the economy will recover sooner rather than later could make the Tech Sector valuations appear much more reasonable. Just remember that we are still in the recession, even though leading indicators continue to point overwhelming to an early recovery. Labor stats remain paltry at best.

Looking ahead, we can't glean a lot from last week's industry results, with extraordinarily large gains from the entire Financial Sector and the poor performance in the Tech Sector, as you can see from the Best & Worst Industries table below. But I continue to expect the market to advance on the broad front while cautioning about valuations, particularly in the Financial Sector and possibly the Tech Sector.

Note:  Stocks to consider this week are show below the tables.

Style & Cap Overview

Current Sector Performance

Best and Worst Industries

Forward-Looking Sector Rankings

Stocks to Consider

I ran a QMaxx search using the Insider Buying preset search. I thought this search might be appropriate given the absolutely astounding performance of the Sabrient Insider Sentiment Index SBRIN, which is tracked by the Claymore/Sabrient Insider exchange-traded fund (NYSE: NFO). It's up +80% since the March lows, and its trading volume and AUM have taken a giant leap, too.

I found the following stock ideas from the QMaxx list (although only AEL is a constituent of SBRIN).

Stryker Corp (NYSE: SYK) - Healthcare
BioScrip (Nasdaq: BIOS) - Healthcare
R.R. Donnelly & Sons (NYSE: RRD) - Industrials
American Equity Investment Life (NYSE: AEL) - Financials

 

This is a commentary from the 5/12/09 Trader's Talk newsletter.  Click here to receive the newsletter via email. It's absolutely free!