What the Market Wants Newsletter - Monthly Analysis of the Market Based on Sabrient's Quantitative Filters

And You Thought December Was Bad!

It is easy to talk about what the market liked last month -- nothing! (Actually, there were a few rays of light, which I’ll talk about later.)

Every component of style and cap size . . . capsized. Forgive the pun, but it is irresistible when each component tanked at least 4%, and the Nasdaq itself sank an alarming 9.9%.

The only positive news of the month was the resurgence of value as a style, due in large part to banks and homebuilders. While the value indices were down 4% or so, they still performed much better in every single cap, from large to micro, than growth, which fell 8 - 10% for the month in the various cap ranges.

The few rays of light mentioned earlier include IndyMac Bancorp (IMB), up 60%, and homebuilder Hovnanian Enterprises (HOV), up 51%. But Sabrient’s value regression filter -- which looks for stocks that are favorably priced -- found a broader source of light than just banks and homebuilders. The top 50 stocks from that filter gained an average of 11% during the month and included many companies that didn’t make loans or build homes.

Some interesting examples are Travelzoo (TZOO), an internet travel company, up 23%; NutriSystem (NTRI), supplier of weight management and fitness products, up 19%; Retail Ventures (RVI), operator of off-price department stores, up 44%; and Pool Corporation (POOL), a swimming pool supply company, up 16%.

So, what happened in January? My take is that the month began with poor economic news and since we had a fresh new year from tax and stock performance viewpoint, asset managers who were holding stocks with significant profits -- think growth or momentum -- quickly sold them to lock in profits. Then, toward the end of the month, these same asset managers sought bargains to begin the New Year. As a result, the value style flourished, sort of, while growth and momentum styles fared poorly.

From a sector viewpoint, the consumer discretionary sector, which includes homebuilders, had a weighted net return for the month of about 4%, financials, about 2%, materials about 1%, and everything else was down -- and in the case of energy and telecommunications, down big (9% and 5% respectively).

What Does the Market Want?

Looking forward, the market appears to want good prices, consistent behavior and analysts calling for good things. From a sector viewpoint, materials look particularly good; financials may have turned the corner (or not, depending on how reinsurance and other issues are resolved), and homebuilders may have bottomed out.

We’ll revisit all this next month.

Next update: The first week of March.