What the Market Wants: No Easy Answer

Courtesy of David Brown, Sabrient Systems and Gradient Analytics

So, what did the market want today? Nothing it appears. It traded on weak volume and had very little movement. This morning the market hated commodities especially silver, but by days end, the market liked silver, gold and even oil but not the dollar. Why?

Last week the economic reports were tough, with bad misses on more than one occasion. But the market tended to ignore the bad news, probably because money continues to pour into equities from money market funds, long term fixed income, and many struggling foreign economies. On Thursday, investors finally caved to even more bad news from Initial Jobless Claims and weak Housing Starts. Then on Friday, when Michigan Sentiment and Leading Indicators posted large positive surprises, the money came pouring back to generate quite a positive week for all the leading domestic indices with Small-cap Growth leading the way, up 2.6% for the week. The Russell 2000 hit new all-time highs closing up 2.2%, and the S&P 500 and DJI both hit new highs up about 2% each. None of that explains today.

In contrast to a successful quarter of better-than-expected corporate earnings, investors had a lot more to worry about than poor economic numbers: a plethora of revenue misses; bubbling problems related to the IRS; and the White House–Benghazi controversy that’s made more than just investors nervous.

Although today’s comments from Chicago Fed President were optimistic, they caused some traders to worry again about QE3 phasing out earlier than expected and that Bernanke might discuss it before Congress as early as this Wednesday. Frankly, there is little news this week with only Existing Home Sales tomorrow, Initial Jobless Claims and New Homes Sales on Thursday, and Durable Goods on Friday. But without question, the key to this week will be Bernanke’s remarks on Wednesday. There is a group of large retailers including Best Buy (BBY), Saks (SKS), Home Depot (HD), and several others reporting earnings before the market opens tomorrow. Obviously, their reports could impact this market that is waiting for more news.

The bottom line is there are no easy answers to “what the market wants.” Our analysis of current valuations showed a bit above average valuations with plenty of undervalued companies remaining. Compared to highs over the last three decades, current valuations are far below them.

Volume was very weak today likely due to tomorrow’s earnings reports and even more importantly Chairman Bernanke’s comments on Wednesday. Small-cap Growth stocks have been leaders for much of the past year (see market reports below). Many Financial, Healthcare, Technology and Basic Materials stocks are attractively priced and can perhaps bolster your portfolio. A VIX related hedge might be appropriate for this particular moment.

Here are the Market Stats.

3 Stock Ideas for this Market

I selected the following stocks from a GARP preset search in MyStockFinder with a focus on small-caps:

Smith &Wesson Holding Corp (SWHC) – Industrials

Trading for 9.45x current earnings and 8.43x forward

Projected EPS growth: 51.9% current quarter, 10% next quarter

Encore Capital Group Inc. (ECPG) – Financials

Trading for 10.85x current earnings and 8.02x forward earnings

Recent upward analyst revisions to EPS estimates

Projected EPS growth: 3.2% current quarter, 12.7% next quarter

Republic Airways Holdings Inc. (RJET)—Industrials

Trading for 9.02x current earnings and 5.96x forward earnings