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Sector Detector: Bulls Say, 'Thanks For The Entry Point'

 March 08, 2012 11:23 AM

After experiencing by far its worst day of 2012, the market quickly turned back up as bulls told the market, "Thanks for the entry point!" In this bullish environment, there have been few pullbacks from which to gain a better entry price on new positions. The accumulation has been unabated. So Tuesday's weakness was greeted as a long-awaited opportunity to buy on Wednesday. The question remains, however — is that all the pullback we're going to get?

Without increased trading volume, bulls were just too undermanned to push through resistance levels of 13,000 on the Dow, 3,000 on the Nasdaq, and 2011 highs on the S&P 500. Riskier indexes like the Russell 2000 have fallen the hardest—but of course they were the ones that had been rising the fastest. Not surprisingly, weakness in stocks has coincided with strength in the dollar.

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Wednesday's bounce was attributed to a variety of positive events. First, ADP payrolls data was strong, giving optimism about Friday's upcoming jobs report. Next, apparently the Fed is considering—as their latest incarnation of quant easing—printing dollars to buy long-term mortgage or Treasury bonds, and then borrowing it back for short periods at low rates, which would make it less likely to create inflation.

Furthermore, there was some optimism that Greece's debt swap would be successful. Thursday is the deadline for bondholders of Greek debt to sign on to participate, so it could be a market-moving day. However, many of the debt holders remain skeptical that Greece will be able to pull off their austerity commitments. In fact, some expect that voters will install a new government that ultimately rescinds their commitments.

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I think there might have been a Super Tuesday impact on the market, as well, since Mitt Romney is widely considered to be the candidate that gives Republicans their best chance at unseating President Obama. His victory in Ohio may have guaranteed him the nomination.

Among the 10 U.S. sector iShares, Materials (IYM) sold off hard on Tuesday, and it has been by far the weakest performer this week. Utilities (IDU) and Consumer Services (IYC) have held up the best. Financial (IYF) was the big leader on Wednesday, but only made up about half of its big -2.2% loss on Tuesday.

Let's talk about Apple Inc. (AAPL). As expected, the juggernaut unveiled the newest version of its iPad tablet, which features an ultra-high-definition "retina" display, a faster processor, a high-def 5MP iSight camera, voice dictation software, and optional 4G LTE wireless networking connectivity. You can't not like this company—whether as a consumer or an investor…or as a casual observer. It seems that Apple never fails to surprise us with innovation and exceeding expectations. Its app store is expanding exponentially. Customer loyalty is off the charts (just ask my daughters). The largest market cap company in the world remains one of Sabrient's favorites.

Sabrient's "Baker's Dozen" Top Stocks for 2012 continue to power ahead of the S&P 500 performance, led by Seagate Technology (STX), Western Refining (WNR), United Rentals (URI), Kronos Worldwide (KRO), and Dana Holdings (DAN). The full report and video can be found here: http://sabrient.com/individuals/Bakers-Dozen-2012-Signup.html

Notably, KRO is also a favorite of Sabrient subsidiary Gradient Analytics, which focuses on forensic accounting, earnings quality, and anomalous executive incentives activity. Although Gradient's main focus is on identifying "at risk" stocks, the firm periodically publishes positive views on stocks having solid earnings quality coupled with bullish executive behavior—primarily in the form of exercise-and-hold options activity. In the case of KRO, Gradient observed a significant improvement in margins on higher sales prices. Also, the chairman continues to accumulate shares, and the firm appears to trade at a discount compared with its peers.

On the other end of the spectrum, several stocks having negative grades from Gradient continue to be weak even in the face of the bullish market, including TeleTech Holdings (TTEC), First Solar (FSLR), SodaStream International (SODA), Iconix Brand Group (ICON), Ritchie Bros Auctioneers (RBA), Accretive Health (AH), Diodes Inc. (DIOD), and Gentex (GNTX).

Looking at the charts, SPY closed Wednesday at 135.69. As I predicted, it made a false breakout above the 2011 highs last week, which served to pull in late-arriving bulls and led to a new 52-week high at 138.19 before reversing to fall as low as 134.26 on Tuesday. This weakness allowed the SPY to work off much of its overbought technical condition.

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