U.S. Equity Market Radar (December 4, 2011)

The domestic stock market as measured by the S&P 500 Index was higher this week by 7.39 percent. All ten sectors of the S&P 500 advanced. The best-performing sector for the week was energy which increased 10.08 percent. Other top-three sectors were financials and materials. Utilities was the worst-performer, up 3.93 percent. Other bottom-three performers were consumer staples and telecom services.

Within the energy sector the best-performing stock was Alpha Natural Resources, up 28.18 percent. Other top-five performers were Newfield Exploration, Peabody Energy, Denbury Resources, and Consol Energy.

Strengths

• Some of the best-performing groups this week were cyclically-related groups, many of which had sold down in the face of the macro concerns pressuring the market in recent months. The coal & consumable fuel group, the best-performing group for the week, was a good example of this type of group. It was up 18 percent with all three of its members (Peabody Energy, Alpha Natural Resources, and Consol Energy) advancing.
• The tires & rubber group, another cyclical group, advanced 18 percent, led by its single member, Goodyear Tire.
• The steel group was also typical of this week’s cyclical outperformers, rising 15 percent, led by U.S. Steel in price performance, but with the other four group members also displaying significant gains.

Weaknesses

• The healthcare facilities group was the worst-performing group for the week, up 0.24 percent, led by its single member, Tenet Healthcare. A major brokerage firm initiated coverage of the hospital company with a “Market Perform” rating, stating that while the opportunity for growth is real, the current valuation leaves little room for share appreciation.
• The specialty stores group underperformed, up 1 percent. Office supply store firm Staples Inc. increased while high-end retailer Tiffany & Co. declined. Tiffany reported quarterly earnings above the consensus estimate, but it guided fourth-quarter earnings below consensus.
• The soft drinks group underperformed, gaining 3 percent. Groups in the consumer staples sector, such as soft drinks, typically are more defensive groups and do not usually advance as much in strong up-markets as do cyclical stocks.

Opportunities

• There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2011 and 2012. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• A mid-cycle slowdown in the domestic economy would be negative for stocks.
• An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.