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What The Market Wants: Turnabout

 May 22, 2012 12:42 PM

(By David Brown) Last week was horrible, while today was quite good, albeit on low volume.  What happened?  Let's review the facts.

Last week, the S&P 500 dropped over -4% to close Friday at the key support at 1295, off nearly -8% from its April high.  Mid-cap Growth was the worst style/cap, down -6.2%.  The best was Large-cap Value, off -4.3%.

One of today's stimulants was the developing consensus that European nations will do what they must to keep the Eurozone intact.  That's one looming problem that, hopefully, has been resolved.  Additionally, China gave indications that it might moderate its policies due to slower growth–another positive. Options expired on Friday, so that creator of volatility is out of the way for another month.

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Economic Releases. Most of last week's economic reports were a little below expectations, although the most important in our view, Industrial Production, was sharply up from a loss of -0.6% to an unexpected gain of +1.1%.  This week is sparsely populated with corporate and economic reports.  We do get several housing reports along the Durable Goods Orders and the Final Michigan Sentiment. These releases could continue to hint at small but steady improvements in domestic growth which have kept the market in a positive direction since last fall, not counting the recent six weeks of flat behavior followed by the sharp nearly -8% drop of the past two weeks.

In other words, the support at 1295 could hold due to a continuation of steady but modest growth in the domestic economy, further bolstered by an improving attitude towards Europe and China.

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Market Stats. Among the sectors, last week was clearly a classic "flight-to-safety" week led by Utilities, Non-Cyclicals, and Healthcare.  Today was a complete turnabout with the dollar and gold down, oil up, and treasuries down.  Basic Materials led the way today among sectors (up more than +3%) followed by classic growth sectors:  Technology (led by AAPL's +6% gain) and Energy.  Financials were dismal last week and didn't fare much better today as JP Morgan's (JPM) woes continued to push financials away from leadership.  Facebook (FB) surprised millions of investors by losing more than 11% of their Friday market debut on huge volume.

Risk remains high until the financial problems of European sovereign debt are resolved, China has clear direction, and our own government's debt and leadership issues are resolved.  All of that could require more patience then the markets have to offer.  Nevertheless, valuations remain quite attractive, especially after the recent 8% market drop.  Continued corporate earnings improvements could keep the markets focused on the upside in light of unattractive alternatives.

4 Stock Ideas for this Market

This week, I used the GARP preset search in MyStockFinder.

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