July 2006

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

Stocks continued to struggle under the dark clouds of a wretched market in June until a dramatic rally on the 29th lifted most indices some 3 percent. Prior to that, virtually everything was down significantly for the month. Even with those two good final days, the Nasdaq ended the month down 31 basis points, the Dow, down 16 basis points, while the S&P 500 "roared ahead" about 1 basis point.

A bit of sunshine broke through the June clouds and shone on the value style and the small-cap segment: Value produced profits across all caps and the small cap index (Russell 2000) was up across all styles.

For the third consecutive month, value outperformed growth in June. Interestingly, value beat growth in large caps and small caps by almost exactly 1% and in mid caps by not quite 1%. It is not unusual for value to lead growth in a down market -- and particularly in a volatile market -- but value is now well ahead of growth for the year in all caps, beating growth by nearly 7 full percentage points in large caps and approximately 4% in the mid-cap and small-cap arenas. Recall, however, that growth had been outpacing value most of the last 12 months, so until we see a calm positive market for a month or two, it may be a bit premature to declare value as the predominant style for the remainder of 2006.

Small caps slightly outperformed other caps during June and continue to dominate other caps in performance over the last 6 and 12 months. For the quarter just completed, however, large caps outperformed the other caps, which should be expected in a bearish market during which there is typically a flight to quality. Assuming the market continues to improve, look for small caps to continue to overshadow large caps as they did in those last two positive days in June.

In terms of specifics, it should not come as a surprise that the market continued to favor cash flow, return on equity, margin improvements and most efficiency numbers (such as ROS and ROA). Similarly, companies with solid dividend growth were favored, and among growth issues, favor continued to fall on GARP stocks (particularly those with strong absolute growth with reasonable prices) and cash flow.

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