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 4, 2008, 3:07 PM PDT
traderstalk@sabrient.com
. . . And so the summer doldrums continue, with the market still finding no clear direction.
Small-cap value maintained its leadership role last week with a 0.9% gain, and small caps, in general, have been the place to be in recent months. Mid-cap value and large-cap value posted matching gains last week, while growth across all cap segments continues to lag. The shift to value has remained in effect since the market bottom in mid-July, and shows no signs of letting up, as recent high-flying growth issues in the materials and energy sectors continue to get battered (see further analysis below).
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Sectors
Those of you who have been following Trader’s Talk since I took over writing it in June might recall what I wrote on June 17: "…Be especially cautious of a correction in oil prices that many market observers keep predicting. The financial sector looks attractive as well…."
Indeed, strong interest in the financial sector, following last month’s reversal, has shot this group to the top of the performance ranks during the past week and month. Isolated incidents of weakness persist, but as a whole, the group has held firmly above its July lows amid the recent seesaw action in the broader markets.
And, yes, energy is finally undergoing its long anticipated correction, and it hasn’t been pretty. Energy inched higher by 0.2% following recent steep losses but is down sharply again as we start the week, along with materials, extending the recent woes of both. In the past month (as of Friday’s close), energy is off 14% and materials 10%, and they fell even further on Monday! Hopefully, you tightened up stops on your positions. Utilities remain in distribution mode as well.
Paper products rallied sharply last week, triggered by a better-than-expected Q2 earnings report from group stalwart International Paper (NYSE: IP) on the heels of bullish Q2 results from group constituent MeadWestvaco. The personal products group gained strength from shares of Colgate-Palmolive (NYSE: CL) after the company topped second quarter estimates. Procter & Gamble reports earnings Tuesday morning, so look for possible further gains in the personal products group. Thrifts and banks were also on the move last week, while precious metals stocks continue their recent slide.
Forward-Looking Sector Rankings
Despite its extreme weakness, energy continues to hold the top score in Sabrient’s 1-month forward rank. The sector is grossly oversold, with a strong fundamental foundation. But downward momentum is awfully strong right now, so I would wait for buyers to start entering the sector before dipping your toes in the murky water. Of note, financials slipped to number eight (out of ten) after holding at number six for the last couple of weeks, so perhaps a period of consolidation is upon us in financials.
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Stocks to Consider
So, the market continues to chop around. Maybe the FOMC meeting will help it find some direction. The market is factoring in no interest rate action from the Fed, so look for any surprises to trigger more volatility.
The long-anticipated correction in energy is upon us, but how far it might go, and how soon and how strong it rebounds, and how it impacts the broader market indexes, are questions that will keep traders on the edges of their seats.
Based on our forward look, I think financials might be due for a rest and consolidation. Energy remains the big wild card, with top scores on our forward rank but a nausea-inducing price pattern. Still, if you have stopped out of most of your energy positions, you might want to consider nibbling on some selective buys. After all, from a fundamental standpoint, energy will remain the lifeblood of a growing global economy – so we might be in the midst of the best buying opportunity of the year in this sector.
I hope you were able to grab a few shares of last week’s picks, because IPHS really took off on Friday after announcing stellar earnings, moving from around $25 when we picked it last Monday to touching $40 on Monday of this week.
Here are some new stocks to consider for this week:
NII Holdings (NSDQ: NIHD) - Telecom
Flir Systems (NSDQ: FLIR) - Technology
Amedisys (NSDQ: AMED) – Healthcare
ENGlobal (NSDQ: ENG) – Energy (Caution: announcing earnings on Aug 7)
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.
