August 2006

[Note: What the Market Wants for August is based on Sabrient's filter backtesting results for July.]

The flow of the market toward quality became a torrent in July. The only things not swept into the red for the month were large-cap stocks with a value style.

Small-caps -- in contrast to their strong performance in June -- were routed to the point where they lost their early advantage and now trail in most categories for the past three and six months. Specifically, small-caps lost over 300 basis points (as measured by the Russell 2000), and if they were a small-cap growth stock, the loss was over 500 basis points. Mid-caps didn't fare much better.

The preference for value stocks that we've seen this year continued in July, lifting value above growth as a style for the past six months by a full 8 percent in all cap ranges.

The factors by which we measure the market's specific preferences were near duplicates to those of the previous month, an anomalous event, to say the least. As a result, we have to conclude that if the market has any preferences at all, they are virtually identical to last month's: companies with solid dividend growth, strong cash flow, margin improvements, and improved efficiency numbers, such as ROA and ROS. Among growth issues, when they are favored at all, GARP stocks, particularly those with strong absolute growth with reasonable prices, get the nod.

We wish we could end on a more positive note, but the market continues to be troubled by world concerns, interest rate anxiety, and a general apathy from the consuming public. We'll review its behavior again the week after Labor Day.