Editor's Note:
David Brown, chief market strategist for Sabrient Systems, will be writing the weekly Trader’s Talk. David is a former NASA scientist, retired CEO of Telescan, Inc., and author of four books on investing. (More about David)
Sabrient is a leading provider of independent, unbiased, quantitative equity research to institutions, portfolio managers, investment advisors, and hedge funds, as well as to self-directed investors. The firm is poised to take a quantum leap forward . . . A cutting edge, proprietary platform, FSYS greatly advances Sabrient’s ability to create, build, test and execute powerful strategies. You will see some of the power of FSYS in David’s weekly Trader’s Talk column. (Visit Sabrient at www.sabrient.com)
By David Brown
Monday, August 18, 2008, 5:07 PM PDT
traderstalk@sabrient.com
It was another bullish week in the market, led once again by small caps.
Style/Cap Overview
The small-cap indices averaged well over 2%, led by small-cap value with a 3% gain and small-cap growth not far behind at 2.2%. Mid-caps didn’t do badly, with their 1% gain for the week, but large caps struggled to eke out minimal gains. In fact, large-cap value actually lost a smidgen.
This stellar performance is not a short-term fluke. If you’ll take a minute to study the Styles & Caps Table, you’ll see that over the past 6 to 12 months, the market has greatly favored small-caps, both growth and value components. This is where you will see the best gains for the foreseeable future.
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Current Sector Performance
From a sector viewpoint, consumer discretionary was favored once again, with consumer staples, information technology and health care all showing a modest profit for the week. Telecomm continues to anchor the bottom of the list, with a nasty loss in excess of 5%.
Financials also did poorly (down over 2%), led by declines in the largest financial institutions. But small-cap financials performed well, with an average gain of more than 2% for the week. The message is clear: Don’t let the weakness in the big guys keep you from investing in small-cap financial stocks.
Materials and energy had a modestly poor week, losing about 1% across the board. Again, small-cap energy stocks were up moderately, but not so in materials. Interestingly, small-cap materials stocks were among the poorest places to be last week.
Among sub-industries, the casinos and gaming group generated a second consecutive week of healthy gains, and, amazingly, have rolled the dice for a 42% gain for the month!
Other top sub-industries were marine, internet retail, home furnishings, and semiconductor equipment. The latter is a bullish indictor in general. Semiconductor stocks rarely do well unless there is a consensus for a positive economy, looking forward.
The poorest performers in sub-industries, as you might expect from the sector rankings, include gold, precious metals & minerals, and integrated telecommunication services, all down 5% or more.
Forward-Looking Sector Rankings
Looking ahead with our sector ranking platform, energy and materials remain on top, as has been the case for many weeks, while information technology has fallen to the bottom.
You should understand that these forward-looking sector rankings are cap-weighted, meaning that a much higher weight is given to the larger cap companies with a much smaller contribution coming from smaller companies. This is because many of Sabrient’s clients look to us to enhance the performance of indices and ETFs, all of which are cap-weighted.
The result is that these forward-looking sector rankings are more appropriate for large-cap than for mid-cap stocks and even less appropriate for small-cap stocks, where the good performance has been during the past year.
In next week’s issue, we will try to include an “average-weighted” score in the forward-looking sector rankings. Average-weighted means there will be no emphasis given to the market capitalization of sector constituents – more appropriate in the recent small-cap environment.
That said, the forward-looking sector rankings continue to indicate that larger companies in the energy and materials sectors are likely to excel over the next three to six months. Consumer staples and information technology, on the other hand, would be among the worst places to look for large-cap companies during this period.
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Stocks to Consider
Based on our analysis and using QMAXX (Sabrient’s customizable stock selection system), we found the following stocks worthy of your consideration. We emphasized smaller cap companies, particularly those within sectors favored in the past week and into the future.
Amerisafe (NSDQ: AMSF) - Financials
Bolt Technology (NSDQ: BOLT) - Energy
Cal-Maine Foods (NSDQ: CALM) - Consumer Goods
EnPro Industries (NYSE: NPO) - Industrials
Note that CALM was originally chosen in the July 15th edition of Trader’s Talk, and has performed exceedingly well. It is still worth considering at this price level.
David Brown
Chief Market Strategist
About This Newsletter
Our goal in this newsletter is to use Sabrient’s quantitative methodology to provide the best hunting ground for styles, caps, and sectors for both longs and shorts – and to provide guidance in areas where you may want to be cautious versus aggressive in your portfolio. In the very near future, we will be using our FSYS platform to produce a look-ahead for the next 1 to 3 months of the most likely performance expected from these styles, caps and sectors.
Also, this newsletter is for you. So we welcome your suggestions as to information you would like to see included in this newsletter. You can send your suggestions to traderstalk@sabrient.com.
