April 2006

[Note: What the Market Wants for this month is based on Sabrient's filter backtesting results for last month.]

The market was a good place to be in March, as it was positive on all fronts. The Nasdaq gained 2.5% for the month, but in general, the smaller you were the more you gained. The small-cap Russell 2000 gained nearly 5% for the month, the Russell Mid-cap Index, more than 2%, and the large-cap indices, more than 1%. In fact, the market has been a good place to be over the past 12 months with the Russell 2000 being up approximately 25%, mid-caps up approximately 20%, and large-caps up somewhat more than 10%.

From a style viewpoint, growth resumed its leadership over value. Although the returns of the two styles were quite similar, the advantage went to growth, which bested value by 20 to 70 basis points, depending on the cap. Growth has continued to outperform value in general over the past three to six months, with large caps being the exception. Only in large caps does value continue to have the better numbers.

In terms of specific attributes, the market continued its preferences of the past six months, aggressively rewarding consistent earnings metrics, such as EPS, cash flow, and margins, for growth stocks. Absolute growth also continued to be rewarded in a fully symmetric fashion. In other words, if you had good absolute growth and were favorably priced you were rewarded; if you had poor absolute growth and were unfavorably priced, you were punished.

In value stocks, the market continued to reward high returns on assets (as long as the P/E was below average) and most strategies that were based on GARP (growth at a reasonable price). Momentum also played a positive role in March as those stocks that had shown the best price gains in the previous quarter, in general showed the best price gains in March.

Recall that February was a dismal month, so despite the change of climate in March, we are not in a trending market as it continues to be buffeted by world events and interest rate direction. But if April continues with the current trend, we should be able to develop a more confident outlook for the months ahead.

The market behavior will be reviewed again the second week of May 2006.