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WHAT THE MARKET WANTS: July 2008

The market picked up right where it left off in the latter part of May and endured one of the worst months on record amid persistent worries regarding the fallout of the credit crisis and its lingering effects on the global economy. Add a weak dollar, higher oil prices, a discouraged consumer, inflationary pressures, geopolitical flare-ups . . . you get the picture, not very pretty.

Investors had no place to hide as all indices posted steep losses for June, ranging from 6.0% for the Russell 2000 Growth Index to 11.1% for the Russell Microcap Value Index. The DJIA swooned 10.2% (its worst June since 1930) and fell to fresh 2008 lows, posting its biggest quarterly decline (-7.4%) since 1970.

The S&P 500 lost 8.6% and closed June just marginally above its January and March lows. The Nasdaq Composite cratered 9.1%, but remains the least weak of the three major indices; it actually eked out a gain of 0.6% for the quarter. The fact that the S&P and Nasdaq did not move to new lows in sync with the DJIA is about the only positive we can glean from this month’s action.

Growth continues to outperform value on a relative basis as has been the case for quite some time now. The only cap-style indices to show gains for the second quarter were the growth indices across all four caps, ranging from 0.6% for the Russell Microcap Growth to 4.4% for the Russell Midcap Growth. And, over the last 12 months, the cap-specific growth indices outperformed their value counterparts by an average of 12%, with the Russell value indices off more than 20% in that period.

The market continues to reward stocks with favorable momentum metrics, particularly group and price momentum (i.e. energy stocks), as well as GARP and analysts' upward earnings revisions and upgrades.

The energy sector (+4.1% in June) remains the only place to offer some respite from the broader carnage. Even the previously resilient materials (-7.5%) and technology sectors (-10.5%) have begun to show cracks. Traditional defensive groups aren’t providing much safety either, so there’s really nowhere to hide besides energy. Consumer discretionary stocks continue to get pummeled and posted the second steepest losses of the major sectors, next to, you guessed it -- financials.

The financial sector (-13.7% in June) continues to experience one negative surprise after another amid more write downs and more capital infusions, so we are not going to try to call a bottom here. The fear of the unknown has taken hold and has resulted in a pervasive attitude to "sell the rallies." The fact is, the financials (and the market) are quite oversold, but history has proven that markets can stay this way for quite some time.

The bottom line is that we are in the throes of a bear market, and stocks are behaving as expected. Looking forward, we’d like to see some type of capitulation, instead of this slow painful grind lower. That, at least, would signal the presence of a short-term bottom. Until then, expect more of the same.

One last thought, however: When market gloom seems at its worst, it has been historically the best time to start buying.


Next update:  Second week of August.