The Quant View: Pausing for a Breath...Or Running Out of Gas?

Was Monday's market action a pause to catch a breath, or is it running out of gas? Pundits are on both sides of the fence, but in my view the trend is still up until proven otherwise.

A steady dose of positive economic data fueled yet another positive week on Wall Street, led by the surging Small-cap Growth stocks, up 5.9%. The worst performance came from Large-cap Value stocks, which were still up 1.5%.

The chief economic concern has been unemployment, so the most welcome news of the week was the labor statistics published on Friday. Yet somewhat surprisingly, Friday ended slightly down for the day, and that slight negative feeling has carried over into Monday, though to be sure, the saber rattling of North Korea doesn't help matters.

Still, one cannot help but wonder whether the current rally is losing steam, or perhaps has completely run out of gas, although I believe the latter is unlikely. If you'll look at the Style/Cap table below, you can see that Small-caps performance is now at approximately 50% over the past three months, with Large-cap and Mid-cap stocks in the high 30% and 40%.

From a sector viewpoint, Industrials led the way, up 5.6% for the week, followed by Technology and Consumer Discretionary. The latter was triggered by fairly positive housing data reports on several occasions throughout the week. Telecom, Financials and Health Care were at the bottom of the sector rankings, but still positive for the week.

From an industry viewpoint, Auto Components was the leader, spurred on by optimism generated by the agreement with the bondholders that resulted in a view that a leaner, meaner GM will emerge from bankruptcy, which was announced last week. Hence, the Auto Components industry was up 9.6%. Machinery, Internet Retail, Airlines and Aerospace & Defense were close behind, while Commercial Banks and Marine companies brought up the rear.

(I talk about the recent past not to bore you, but to use the past to identify trends that might help as we look to the future. As Shakespeare said, "What's past is prologue.")

Looking ahead with Sabrient's Forward-Looking Sector Rankings, Utilities remain on top, followed by Telecom, Energy and Health Care. Materials, Technology and Financials sit at the bottom. As we have pointed out in recent weeks, our models are indicating that these sectors are reaching "full" valuations.

In light of our cautionary concern about the rally possibly running its course, you should be prudent with your investing decisions in the week ahead. But there are still bargains to be found among Small-cap Energy and Health Care companies, and of course, in the Utilities 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 MyStockFinder search (http://MyStockFinder.com - a.k.a., QMaxx) using the GARP preset search and up-weighting insider buying (to 10) from the Utilities, Energy, and Health Care sectors. Here are some stock ideas from the top of the list that look intriguing:

NRG Energy (NYSE: NRG) - Utilities (Independent Power Providers)
Calumet Specialty Products Partners L.P. (Nasdaq: CLMT) - Energy (Oil, Gas & Consumables)
Impax Labs (Nasdaq: IPXL) - Healthcare (Pharmaceuticals)

 

This is a commentary from the 6/9/09 Trader's Talk newsletter.  Click here to receive the newsletter via email. It's absolutely free!

NOTE: Sabrient's Investor's (H)edge Portfolio is available now and absolutely CRUSHING the market! Available only through greenfaucet!