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What The Market Wants: What Else Does The Fed Need?

 September 10, 2012 09:16 PM
 


Last week's events moved the market in a positive direction.  ECB President Draghi did indeed get approval to implement his sterilized bonds to assist weaker European nations from defaulting on their sovereign debt. And with a change of heart, Chancellor Merkel announced over the weekend that Germany would try to prevent a forced Greek withdrawal from the euro.  In addition, Chairman Bernanke got some serious evidence that continued unemployment requires QE3.  Despite positive employment news from the ADP Private Report, the Bureau of Labor Statistics major employment report showed much-worse-than-expected job growth.  And if the Fed needed more data, they got it from a weak Construction Spending Report and a slightly weaker-than-expected ISM Manufacturing Report.

[Related -Fusion-IO, Inc. (NYSE:FIO): Stiff Competition May Hurt Margins; M&A Remains Key Catalyst]

Then, today, Consumer Credit was reported at -$3.3 billion compared to an expected +$10 billion and last month's +$9.7 billion.  And this surprise included gains in automobile credit (remember the positive auto sales number from last week) and increased students loans.  What does this mean?  The only plausible explanation is that, due to economic concerns and lack of job growth, consumers are not taking on more revolving debt or credit card debt for retail spending.  

We get the Trade Balance data tomorrow and Wholesale Inventory data before the Fed meets on Thursday.  We are NOT stating that the FED will move to QE3, but they certainly have some data points to consider that indicate the economy continues to weaken—AND they (the Fed) got Europe to commit first.  Obviously, it is the Fed's decision, and they have information that we do not; but the odds seem high that they should and will take action.  Today's market weakness may be signaling that most investors think the Fed won't or that they are simply going to wait and see—probably a wise decision.  But if the Fed takes strong action, we will have the double stimulus we have been looking for, and on top of that, China is adding their major infrastructure building plans to keep their growth going. 

[Related -Sector Detector: Is There Still Enough Fuel In The Bulls’ Tank?]

Here are the market stats.  

Sector behavior last week tightened. That is, weak sectors behaved well due to the ECB move, especially Basic Materials and Finance, leaving us with a smaller spread between the most and least attractive sectors.  Absent continuation of the European plan and some help from the Fed, I would be careful to avoid both of the strongest sectors: Basic Materials and Finance.  If you are optimistic that the Fed will move, then most of the growth sectors should be attractive to you.  Furthermore, the Small-cap Growth style was the best performer last week, but for the same reason as above, it is vulnerable to profit-taking if the stimulus does not continue.  Healthcare and mid- or large-cap companies might be the safest bet, but growth plays will be the best bet if the stimulus expands with QE3

4 Stock Ideas for this Market

This week, I created a custom search in MyStockFinder that picked stocks with strong GARP characteristics in the sectors and market caps favored in Sabrient's market stats. While small-caps have been the best performers, we feel, given the upcoming Fed meeting, that large-and mid-caps are better places to put your money. Here are four for your consideration:

Western Digital Corporation (WDC) — Technology

Questcore Pharmaceuticals, Inc. (QCOR" title="QCOR : Stock Quote, News and Research" class="showrtquote">QCOR)—Healthcare

Tesoro Corporation (TSO)—Energy

Watson Pharmaceuticals (WPI" title="WPI : Stock Quote, News and Research" class="showrtquote">WPI)—Healthcare

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