Sabrient - Monthly Analysis of the Market Based on Sabrient Filters

By David Brown, Chief Market Strategist

[Editor's Note: What the Market Wants for September is based on Sabrient's filter backtesting results for August.]

September, historically the weakest month of the year, was anything but, as the market extended August's solid gains. The large-cap indices, led by a 3.4% advance in the Nasdaq, paced the market in September. All other caps and all styles were up as well, ranging from 1% to over 2% for most indexes to as low as 3 basis points for the micro-cap growth index.

On the style front, the competition between growth and value ended in a draw. Growth outperformed in the upper end of the market cap spectrum, while value outpaced growth in the small-cap and micro-cap segments. Despite growth's recent strength after several months of underperformance, value still remains the leading style for the most recent quarter, trailing 6 months and 12 months, and year-to-date. Since it has been a value world, with the exception of the last 6 to 7 weeks, it's a little early to exchange our value stocks for growth.

After years of small-cap and mid-cap dominance, large-caps have assumed the leadership role during the recent two-month advance. (In fact, the mega-cap Dow Jones Industrial Average set a new high during the first week of October, eclipsing its previous high from January 2000.) During the last 3 and 6 months, a pattern has emerged that shows a direct relationship between market cap and performance: Performance increases as stocks move up the market cap spectrum. This reverses a long-term trend that has been in place for the past several years, but it remains to be seen whether this is a short-term blip or the beginning of a sea change.

A trend that continued from August was the market's rewarding stocks with low valuations and solid growth. Stocks with earnings momentum also fared favorably for the second consecutive month, and issues sporting strong group and price momentum outperformed.

For two months in a row now, the market outlook has been positive amid a seasonally weak period for stocks. If stocks can maintain their ground in October (the second-weakest month of the year), we could see higher prices into the New Year as November and December are typically favorable months for the stock market. Nevertheless, we're still operating in a climate of uncertainties about interest rates, global concerns, and political tensions, so cautious optimism is advised.

We'll review the market behavior again the second week in November.