The Quant View: Market Whiplash of Historic Proportions

By David Brown | September 23, 2008 | 1:12 PM | 1 Comment

It should come as no surprise that the Financial Sector led the way in last week’s recovery. The unweighted (small-cap) financials were up 6.4%, but the sector’s weighted (larger cap) returns were a robust 8.5%. That’s because the very large-cap financial institutions seem to have the most to gain by the GBP.

The other two sectors that have regularly appeared at the top of our list did very well last week, with Materials up 2.7% and Energy up 2.4% in the larger cap (weighted) returns and almost 1% in the unweighted returns. Just as our system has been forecasting, Health Care brought up the bottom with a -1.5% return. Telecom (-1.3%) didn’t do much better.

 

Best and Worst Performance in Sub-Industries

As for sub-industries, anything with “financial” in its name – directly or implied – did very well last week. Gold topped the chart with an 18% return, while banking and insurance groups slipped into the next four slots. Life & Health Insurance was up 16%; Regional Banks were up 10% (the larger regional banks gained a whopping 22%). Property & Casualty Insurance and Investment Banking & Brokerage each gained 8%, when small caps were equally weighted, while the larger-cap-weighted returns for both groups went to double-digits.

There are no similarities in the three worst-performing sub-industries. Consumer Electronics have nothing to do with Alternative Carriers which has nothing in common with Independent Power Producers and Energy Traders, but there they are at the bottom of the heap.

 

Forward-Looking Sector Rankings

Looking ahead, Energy and Materials continue to have the best scores, Health Care and Technology still have the worst, and Financials remain solidly in the middle of pack.

 

Wrapping Up

It would appear that the impending disaster at AIG (NYSE: AIG) has been averted by the GBP. The AIG bailout specifically, and the proposed GBP in general, should indeed stabilize financials. If this plan is accepted by the rest of the globe, the current market level should end up as a pretty good base. The key is whether or not the GBP stimulates the economy. There are mixed opinions on this, but the consensus seems to be positive.

Overall, market stability seems to have been preserved by the events of late last week, although Monday’s selloff, which was not included in my analysis, is a bit disconcerting. I think the drop reflects market doubt that the proposed GBP will actually occur, but I also think the odds are that it will take place, albeit with a few tweaks. Although speculative, the market now offers an attractive entry point, especially in financials, so you might want to consider some selective buying in the small-cap arena.

Here are some stock ideas for your consideration from our trusty QMAXX artificial intelligence screen. I focused this week’s picks based on the top sectors in our forward rankings:

•  Targa Resources Partners (NSDQ: NGLS) – Energy
•  Greif (NYSE: GEF) – Materials
•  RAIT Financial (NYSE: RAS) – Financials – very high dividend yield!
•  Republic Airways Holdings (NSDQ: RJET) – Industrials – yes, an airline!

 

 

Content excerpted from the 09/23/08 Trader's Talk newsletter.

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Insightful Commentary http://globalcapital.blogspot.com What stood out to me in this article is a phenomenon that seems to buck conventional wisdom. We are often told by the "experts" that during difficult economic times, the equity sectors to "hide out" in are technology, healthcare, and consumer staples. However, your article indicates that these were the worst-performing sectors recently. Interesting! Perhaps this is why they are called "experts"; they are just ex-spurts! Submitted by sbenard on Wed, 2008/09/24 - 12:33pm » reply |