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Sector Detector: Stocks Reload For Run At Highs

 February 02, 2012 09:36 AM


The stock market has continued its bullish ways—thanks to indications of an improving U.S. economy and diminished concerns about Europe's economic stability. The S&P 500 finished January up +4.4%, while the "riskier" Nasdaq finished the month up 8.0% and the MSCI Emerging Markets Index gained 7.7%. Yes, investors are boldly embracing the "risk on" trade. 

On Wednesday, a successful debt offering from Portugal was well received, the Institute for Supply Management (ISM) reported improving conditions in the manufacturing sectors, and factory activity increased in China and Germany—although overall activity in the euro-zone continued to shrink. Nevertheless, European stocks have rallied during January while bond rates have fallen.

[Related -Buffett's Market Indicator Flashes Red, Prepare To Sell]

The bulls still control the action, and sectors with the highest Sabrient Bull scores (indicating relative outperformance during particularly strong market periods) have tended to be the leaders. Among the 10 sector iShares, Basic Materials (IYM), Technology (IYW), Industrial (IYJ), and Financial (IYF) were the leaders in January. Wednesday's market strength was led by Financials, Materials, and Industrials, which have the highest Bull scores. 

"Don't fight the Fed" has been the slogan emboldening the bulls, along with improving conditions in the U.S. and emerging markets. But now you might expand it to say, "Don't fight the central banks," as they are all putting their best efforts into fighting global recessionary forces emanating from Europe's bank and sovereign debt crisis. Still, conditions in Greece remain dicey. The biggest stumbling block to a bailout package for Greece is the severity of austerity measures that the EU is demanding before authorizing additional funds. Greek leaders refuse to accept forced wage cuts that they see as draconian but the EU sees as essential. Something's gotta give.

[Related -PBoC joins other major central banks with unconventional monetary policy action]

Even if Greece relents and accepts the austerity measures, such actions (besides fomenting popular unrest) serve to reduce economic activity rather than stimulate it. So, under any scenario that unfolds, we should expect Europe to remain a ball-and-chain on global economic growth. 

In fact, Bloomberg reported that European equity valuations compared with the U.S. have fallen to the lowest levels in eight years as the economic forecast for Europe remains bleak while U.S. projections have brightened. They further note that the Stoxx Europe 600 trades at 1.43x book value compared with the S&P 500 at 2.14x. But earnings is the name of the game rather than assets, and it is U.S. companies that are reporting reasonably good earnings. 

For example, the top pick in Sabrient's annual "Baker's Dozen" Top Stocks for 2012 is Seagate Technology (STX), and the stock roared ahead by +20% on Wednesday on a terrific earnings report. The stock is now up +55% year to date. And it offers a nice 4% dividend yield, to boot. 

In case you missed it, Sabrient's complete Baker's Dozen list of 13 stocks was unveiled on January 5 in a free live WebCast. The full report and video replay are available here:
http//www.sabrient.com/individuals/Bakers-Dozen-2012-Signup.html

Also worth mentioning is Wednesday's filing of the long-anticipated Facebook IPO. Apparently, the market's current appetite for stocks makes this look like a good time to price the deal, although it probably won't happen before May. Many analysts are expecting that the IPO ultimately will be valued in the range of $75-100 billion—simply amazing. Although my daughters and their friends are on Facebook constantly, and I dabble a bit myself, I still don't understand how the company makes much money through ads and apps. The filing claims that the firm has over 800 million daily users, $3.7 billion in revenue, and $1 billion in net income, but…c'mon, $100 billion? In any case, Mark Zuckerberg is soon to become one of the world's richest people.

As I discuss last week, the SPY chart seemed to want to consolidate in place while working off its overbought technicals, and that is what it has done. I still don't foresee a major selloff in the cards … unless of course a major news event takes center stage. RSI, MACD, and Slow Stochastic are all holding up, although a cycle back down to short-term oversold would give the market better footing from which to march higher.


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