What the Market Wants: Market Will Likely Challenge Earlier Highs this Week

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Courtesy of David Brown, Sabrient Systems and Gradient Analytics

The market responded well today to good economic news and to the positive and somewhat surprising response to the election of a moderate Iranian President. Some moderation in Turkey didn’t hurt either, and overnight positive markets in Asia and Europe gave bullish investors enough encouragement to buy equities broadly.

This drove all three major domestic indices up about 1% before a late small selloff left the S&P 500 Index up nearly 1% and the Nasdaq and Dow Jones Industrial Average both up well over 0.5%. We think it likely this week that the market will challenge highs set in late May.

Today’s positive economic news included a Housing Market Index up to 52, well above last month’s 44 reading and an expected 45. Even better, the Empire State Manufacturing Index jumped to 7.84 from last month’s negative (-1.4) report and well past the expected reading of 0.5!

A number of additional economic reports will follow today with the Consumer Price Index and housing starts tomorrow, followed on Wednesday by the FOMC forecasts and the Fed Chairman’s press conference. These will be followed on Thursday by the weekly initial jobless claims which were BETTER than expected last week, the PMI Manufacturing Index, existing homes sales, LEI, and the Philly Fed Survey.

Friday is quadruple witching day, which occurs when the contracts for stock index futures, stock index options, stock options, and single stock futures all expire on the same day. It will likely be quite a volatile day.

Analysts are generally positive about this week’s economic reports which probably explains today’s rise of markets globally. Funds continue to flow towards equities and away from long-term fixed income as interest rates continue to creep upwards.

Last week’s style/cap leader was once again small-cap growth, which was down only 0.41%. Small-cap growth led the past month and past six months as well.

Large-cap growth lagged all other style/caps, down a full percent. Indeed, large-cap growth has now lagged the past six and 12 months, as large-cap valuations are a bit higher than mid-cap and small-cap stocks.

Here are the market stats.

Amid the uncertainties of last week, sectors were led by the classic flight-to-safety sectors Healthcare, Consumer Non–Cyclicals, and Utilities. The interesting variation from classic flight to safety was the preference for small caps. This was likely caused by global concerns and rising interest rates, both of which would impact larger companies more than smaller companies.

So this week we will favor small-cap and mid-cap companies that we believe are undervalued. We also continue to recommend the consideration of hedging using VIX-related instruments such as the VXX ETF.

4 Stock Ideas for this Market

I selected the following stocks from a MyStockFinder search, concentrating on undervalued small-cap and mid-cap stocks..

Genesco, Inc. (GCO) – Consumer Cyclicals – Mid-cap

Retailer and wholesaler of footwear, apparel and accessories.
Steady earnings growth with an expected 15.0% per year over next 5 years
Forward P/E of 10.92
Price on 6/17/2013: $70.01

Spreadtrum Communications, Inc. (SPRD) – Technology – Small-cap

Fabless semiconductor company headquartered in Shanghai, China
Expected growth rate is 58.5% for current quarter, 72.7% for next quarter, 35.8% for 2013, and an average of 25.47% per year for next 5 years.
Undervalued with a forward P/E of 7.83.
Dividend yield: 2.1%
Price on 6/17/2013: $21.93

Thor Industries, Inc. (THO) – Consumer Cyclicals – Mid-cap

Manufactures and sells recreation vehicles and small and mid-size buses
Earnings growth expected to be 28.8% this year and 19.6% next year
Forward P/E of 13.65
Dividend yield: 1.6%
Price on 6/17/2013: $47.50

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems
Leaders in Investment Research

http://www.sabrientsystems.com

Full disclosure: The author does not hold positions in any of the stocks mentioned in this article.

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.