February 2006

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

The New Year began with a very interesting and profitable January. The major indices were led by the Nasdaq, which was up about 6% in mid-month and ended the month ahead 4.5%. The S&P 500 was up about half that figure, while the Russell 2000 roared ahead steadily throughout the month for a gain of nearly 9%!

Style-wise, the results were somewhat surprising. Growth continued to lead the mid-cap and small-cap sectors, ahead about 100 basis points over the non-style index in each cap. In large caps, however, value outperformed growth by more than 200 basis points, which restored value to its lead over growth for the last quarter and trailing 12 months. Large-cap growth companies were in fact the poorest performing segment of all styles and caps, gaining only 1.7% for the month. This was largely due to a spate of non-stellar earnings reports by large technology companies.

It is not clear whether this one-month divergence in style preference between large and small caps will continue or is simply a one-month oddity. You may recall that growth has been the favored style for the past six months in the broad markets, and except for the large-caps, it continued that leadership in January.

It is not surprising that GARP -- growth at a reasonable price -- was a favorite strategy across all caps during January, since GARP is a combination of growth and value attributes. However, even among the favored mid- and small-cap companies, the market rewarded absolute growth of earnings along with strong cash flow, and of course both at a reasonable price. It is noteworthy that instead of the emphasis on long-term earnings characteristics that had been favored over the past several years, the market now seems more interested in shorter term earnings growth and operating results. It is also rewarding group strength, along with price and EPS momentum.

The market began February on a relatively weak note, so we must wait to see how the month ends before we can say whether or not last month simply exhibited the typical small-cap January effect or was indeed something more important.

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