What the Market Wants - Monthly Analysis of the Market Based on Sabrient Filters

Growth and Technology Lead the Way

The market moved broadly higher in October, with technology and growth stocks leading the way. Among the major indices, the Nasdaq Composite took the lead for the third consecutive month with a 5.8% gain in October. This follows respective gains of 2.0% and 4.1% in August and September and tags the index with an impressive year-to-date advance of 18.4% -- doubling that of the S&P 500 (up 9.5% YTD) and besting the DJIA by 660 basis points (up 11.8% YTD).

This month’s move in the Nasdaq, which represents about a third of its 2007 gains, propelled the index to its highest level in nearly seven years. The DJIA, which had been running neck-to-neck with the Nasdaq for most of '07, just managed to eke out a gain (0.25%) in October, while the S&P 500 climbed 1.6%.

The small-cap sector was the cap segment du jour and flip-flopped with large-caps for the fourth consecutive month. The Russell 2000 rallied 2.8% in October; the other three cap indices posted nearly identical gains of 1.5% - 1.6%. However, looking back over the past 6 to 12 months, the upper end of the cap spectrum has outperformed.

While the various cap segments duke it out for supremacy, growth continues to dominate value. The Russell 2000 Growth Index was the second best performer among all of the indices we track (up 4.5%), followed by large-cap growth (up 3.3%) and micro-cap growth (up 3.2%). This compares to modest losses and middling gains for the comparable value indices of between -0.4% (micro-caps) to 0.9% (small-caps). Clearly, the market is rewarding growth stocks, a trend that began back in April and shows no signs of slowing down.

This shift in style has been fueled by a combination of investors’ increased appetite for risk and slumping financial stocks (traditional value plays) that got smacked in early March on subprime fears and are still reeling eight months later. Many of the big guns in the sector got hit hard in October (after taking it on the chin in round two over the summer) following exceedingly weak Q3 earnings reports that surprised even the biggest of skeptics. This may be a sign of tougher times ahead for the beleaguered financial services sector.

Attributes that are currently being rewarded by the market include strong cash flow, earnings, and revenue growth, along with EPS and price momentum and group/sector rotation. GARP-like companies are also showing strength but to a lesser extent.

The stock market's resiliency amidst a host of lingering uncertainties continues to impress us, and we will not be surprised to see the major indices move higher into the seasonally positive last two months of the year. The growth-oriented technology sector is where the money is flowing and where we believe there is plenty more upside.

Next update: The first week of December.