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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)
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By David Brown
Monday, July 7, 2008, 3:40 PM PDT
traderstalk@sabrient.com
The holiday-shortened week was no picnic in the market. Frankly, it had all of the symptoms of a recessionary fear capitulation. Large-cap value (down 1.6%) easily suffered the least damage in the week, the first time in recent memory that this style-cap had the best single-week performance. The fact that large-cap value was the best performer is a major symptom of recessionary fears. If you think the economy is worsening, you’ll head to large caps, and to value, in particular.
In general, among large-cap and mid-cap stocks, value did better than growth, but not by a significant margin. All small caps were trounced to the tune of 4% or more.
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Sectors
Sector performance backs up the feeling that recessionary fears dominated the week. The only positive sector was Health Care, up 2.1%. Utilities managed to break even for the week, but everything else lost money. Even Energy was down 1.35%.
Materials fell a startling 5.7% to end up at the bottom of the performance list. Not too surprising, as that sector normally falls dramatically when recessionary fears are at their worst.
The fear of recession is even more pronounced when you consider that the sub-industry Gold was up more than 2% for the week (always the case during recessionary fears). Other positives among the sub-industries include Biotechnology (primarily large-caps, up 4.4%), Education Services and Pharmaceuticals (each up 3.5%), and Household Products (up 1.7%).
All these top performers represent that same flight to recession-proof industries.
At the other end of the spectrum, finance continued its downward spiral, with Specialized Finance losing 10.7% for the week. The biggest losers were Steel (-12.3%) and, somewhat surprisingly, Casinos and Gaming (-15.2%), a group which often holds its own during recessionary periods.
Forward-Looking Sector Rankings
Our forward-looking sector line-up resembles last week’s, with Energy again on top by a wide margin and Consumer Staples at the bottom. You’ll note that Financials continues to rise as stock prices in that sector continue to fall. This is because our system indicates that the continued price fall is more than the fundamentals warrant. I believe that the Financials sector is ripe for a bit of prudent stock-picking. That said, the sector as a whole has been in virtual freefall, and we all know how hard it is to catch a falling knife.
Forward-looking fundamentals have also pushed Health Care even closer to the bottom. This means that the market’s recessionary fears are driving prices higher in this sector than even forward-looking fundamentals would dictate. Consumer Staples present a similar situation.
We are now more than 20% below recent highs in all major indices, the classic symptom of a bear market. Also note that we have now given back all of the 12-15% rally that was made after the St. Patrick’s Day low, plus a couple of percentage points. The key going forward is whether or not this is the final capitulation to the looming recession. Or have we not yet reached bottom?
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Stocks to Consider
Although I wouldn’t suggest being fully invested right now, certain sectors seem to merit selective stock picking, as the market tries to find a bottom. Energy and Materials might be providing long awaited entry points, and I think we are close to a tradeable bottom in Financials, Technology, and Industrials. Insurance stocks, in particular, are starting to score better in our system.
Here are some possible candidates, which I found with our QMAXX stock screener:
Jabil Circuit (NYSE: JBL) - Technology
FLIR Systems (NASDAQ: FLIR) – Technology
AZZ Inc. (NYSE: AZZ) – Industrials
Validus Holdings (NYSE: VR) – Financials/Insurance
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.
