The Quant View: Chop, Chop...

We saw lots of chop during options expiration week, and a retreat from the sector that's been on a tear of late. Is it ready to resume the uptrend? Today (Monday) was a pretty good day, to be sure, but traders are wondering if it will continue.

Market sectors were down across the board last week, from -4% to -8%, depending on whether you were in Large-cap Growth stocks (down -4%) or a Small-cap Value stocks (down -8%), with everything else falling in between. It was certainly a healthy retreat after a persistent climb.

The worst sectors were Financials, which fell almost -10%, and Energy and Industrials, losing -6.5% and 7%, respectively. Just keep in mind that the Financial Sector had been up the most over the past several months. The normal bastions of safety during weak markets - Health Care and Consumer Staples - did the best for the week, down -0.3% and 0.5%, respectively.

As has been the case for the past few weeks, economic data was mixed last week. Retail sales data surprised negatively, as the small increases in consumer spending in January and February did not carry through to April. On the other hand, PPI and CPI were flat, which, of course, is good, and industrial production was weak.

Long-term interest rates continue to edge up, although it is certain that the Fed and administration will fight to keep these rates near historically low levels to facilitate the economic rebound. Keep in mind, however, that government spending surely will eventually escalate long-term rates, since there is no free lunch. But market valuations, which are on the historically low side, could easily handle a modest increase in interest rates.

On an industry level, the few small pockets of strength in the down week were Chemicals, Software, Beverages, and Pharmaceuticals. The weakest industries were Auto Components, Consumer Finance, and Building Products.

Today (Monday, May 18), the market resumed its upward trek, buoyed by a bounce-back in financial stocks, short covering, and positive news from the building industry.

Looking ahead, our forward outlook rank puts Utilities at the top, despite its extreme weakness during the past week. Telecom and Energy, in the second and third spot, continue to point sharply upward, while Materials, Technology and Financials continue to point downward.

As we have noted in recent weeks, Technology and Financials both have reached full market valuations, based on the current economic environment. Only a very positive attitude toward near-term growth would support the current price levels in these sectors.

While we expect the choppiness to continue into the summer, the market still has an upward bias, due to cash on the sidelines and aggressive short covering.

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

Rather than my customary QMaxx search today, I decided to look at the largest holdings in our Sabrient Insider Sentiment Index (Amex: SBRIN), given its astounding performance recently. It's up +76% since the March lows. (Note: It is tracked by the Claymore/Sabrient Insider exchange-traded fund (NYSE: NFO),

Every stock among the top 10 holdings was up at least 6% today while the S&P 500 was up 3%. Out of the top 10 holdings by dollar value, the following stocks currently carry Buy or Strong Buy ratings in our Sabrient Rating Algorithm (SRA):

Aflac, Incorporated (NYSE: AFL) - Financials (Insurance)
ATP Oil & Gas (Nasdaq: ATPG) - Energy (Oil & Gas Operators)
Reinsurance Group America (NYSE: RGA) - Financials (Insurance)
Deluxe Corp (NYSE: DLX) - Consumer Staples (Office Supplies)
Insight Enterprises (Nasdaq: NSIT) - Financials (Financial Services)

 

This is a commentary from the 5/19/09 Trader's Talk newsletter.  Click here to receive the newsletter via email. It's absolutely free!