WHAT THE MARKET WANTS: June 2009
Long Live the Bull!
(June 2, 2009 3:10 pm PST) May was indeed another solid and positive month as the S&P 500, as well as the Nasdaq and Russell 2000 indices, all crossed over their 200-day moving averages to the positive side. So by most investors' definition, we have entered a bullish market, albeit still a baby bull.
While May did not equal the robust gain of April, it was still a solid month by any standard, with most major indices up nearly 5% or more. The best of the indices was the Russell 1000 Value, up 5.9%, but the S&P 500 and the Russell MidCap Value weren’t far behind, with returns of 5.3% and 5.5% respectively. The worst performer was the Russell MicroCap Value, which still gained 1.3% for the month.
The last quarter was among the strongest in a number of years, with nearly every index up close to 30%. While the Russell MicroCap Growth was the best (+33.3%), all other indices were up at least 25%, except for the Dow, which was up a "paltry" 20%.
Most of the six-month numbers are now in the black, led again by MicroCap Growth, with a gain of 19.7%. The Nasdaq itself was up over 15% for the six months, and the entire MidCap Index was up nearly 13%. Naysayers will point out that we’re still down more than 30% for the trailing 12 months, no matter where you look, and that is true. Technically, we are still in a recession, and it is not clear that we will move out of it before the end of this year. But the signs are increasingly positive.
Most of the leading economic indicators have surprised to the positive side over the past month, with only labor statistics and housing data negative. Of course, it is not a good thing to have more people losing jobs than finding jobs each week, and this will continue to weigh on the market until we finally have growth. And while the banks seem to have passed the stress test in reasonably good shape, there is still an overhanging concern about commercial real estate loans and credit card debt.
Nonetheless, the market bias is clearly positive, with considerable monies on the sidelines pouring back into the market and the historically high short positions continuing to unwind, all of which fuel stock price growth.
We find it interesting that across all caps the three leading Sabrient filters (i.e., what the market is now rewarding) are the same three, though in different order: Momentum, Primary Value, and Turnarounds. What this means is that your best chance of having winners in this market are stocks with momentum or stocks with good earnings that also have strong valuation (i.e., GARP or growth at a reasonable price). Also being rewarded are companies that have had several poor years and deep stock price declines and are now beginning to turn their businesses around.
Over the past two months of strong market behavior, value has outperformed growth compared to the strong growth-over-value performance of the previous four or five months. This should tell us that while valuations remain below average, certain sectors may be fully valued, if not overvalued. Particular care should be taken in the Financial, Technology, and Materials sectors.
Despite the more than 40% climb from the March 6th lows, the market remains approximately 40% below the late 2007 highs, and average stock valuations remain somewhat below the averages of the past 10 years. Considering the potential dangers of a recessionary economy and continuing concern about the banking infrastructure, the astute investor should continue to seek out strong valuations, as opposed to chasing momentum trends. GARP stocks would probably be the best choice, as momentum stocks carry the highest risk and authentic turnarounds can be hard to predict during economic times such as these.
Until next month,
David Brown
Chief Market Strategist
Sabrient Systems, LLC
Next update: Second week in July.
