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

Market Enjoys Long-Awaited Upturn

Fueled probably by significant short covering, the market finally had a good month in August. Virtually all indices were up about 1% for the month, except for mid-cap value which was down slightly.

Somewhat surprising, the best of the bunch was the Russell 2000 Growth Index, which gave small-caps their one "month in the sun." And as further evidence that technology stocks led the recovery, of the major indices the Nasdaq Composite led the way with a gain of almost 2%.

The big issue now is how sustainable is this one-month rally? If it was fueled primarily by short covering, it may not be sustainable, although short interest remains near record levels. Furthermore, it is unlikely that we have heard the last of subprime mortgage disasters. While refusing to promise to bail out overleveraged hedge funds, the Fed has indicated a willingness to keep the economy going. As a result, the early days of September have continued the general positive pattern of August.

As a style, value continued to trail growth through most of the last year -- and by a lot over the past six months. But it isn't clear whether this is solely attributable to the subprime mortgage fallout on home builders and financial institutions. A back-of-the-envelope check shows that, net of home builders and financial institutions, value has more or less kept pace with growth over the past 12 months.

Taking a look at our filter behavior, the market is clearly rewarding earnings momentum and most growth models. And, more than anything else, it is rewarding cash flow growth, as has been the case for some time.

At any rate, with summer over September will be an important month to see where the market heads next. That won’t become clear until early October when we will know the quality of third quarter earnings reports.

Next update: Second week in October.