Roundup: Index Summary and U.S. Equity Market

Index Summary

  • The major market indices started the New Year on a positive note. The Dow Jones Industrial Index rose 1.82 percent. The S&P 500 Stock Index advanced 2.68 percent, while the Nasdaq Composite finished 2.12 percent higher.
  • Barra Growth underperformed Barra Value as Barra Value finished 3.41 percent higher while Barra Growth rose 1.96 percent. The Russell 2000 closed the week with a gain of 3.07 percent.
  • The Hang Seng Composite finished higher by 2.13 percent, Taiwan gained 1.13 percent, and the KOSPI advanced 0.74 percent.
  • The 10-year Treasury bond yield closed at 3.83 percent, unchanged for the week.

Domestic Equity Market

S&P 500 Economic Sectors

In the first five trading days of 2010, the S&P 500 was up each day for a total price gain of 2.68 percent. Goldman Sachs economist Jim O’Neill calculates that in the past 36 occasions when the S&P 500 has been up after the first five trading days of the year, the index has been up for the year 31 times (86.1 percent), and that the average gain in those 31 years was 13.7 percent. This is known as the “5-Day Rule,” and it gives us reason to be optimistic for this year.

The best-performing S&P sector for the week was financials, up 5.8 percent. Other better-performing sectors include materials and industrials. Underperforming sectors were telecom services, utilities and consumer staples.

Within the financials sector, the five best-performing stocks were all regional banks, led by Zions Bancorporation, up 27.9 percent. The other top performers in the sector were Marshall & Ilsley Corp., Keycorp., Regions Financial Corp. and Huntington Bancshares Inc.

Within the technology sector, the best-performing stock was NVIDIA Corp, up 3.3 percent. The other top-five outperforming stocks in the sector were Agilent Technologies Inc, Salesforce.Com Inc, FLIR Systems Inc, and Visa Inc.

Strengths

  • The automobile manufacturer group was the best-performing group for the week, rising 16.9 percent, led by its single member, Ford Motor Co. Ford’s December U.S. light vehicle sales increased 23 percent year-over-year on a selling-day adjusted basis, significantly above the Bloomberg consensus estimate of up 13 percent year-over-year.
  • The oil & gas drilling group outperformed, up 14.5 percent, led by Nabors Industries Ltd. A major brokerage firm upgraded the driller’s stock from “sell” to “neutral,” citing that roughly 50 percent of the company’s fleet is composed of high-specification rigs in high demand from the emerging shale plays and currently operating at greater than 90 percent industry utilization.
  • The regional bank group outperformed, rising 11.7 percent. This group had been underperforming in recent weeks, but investor sentiment appeared to shift this week with many of the stocks in the regional bank group showing nice percentage gains

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Weaknesses

  • The integrated telecom group was the worst-performing group, down 3.3 percent, led by Verizon Communications Inc. In an 8-K filing, the company said that it expects fourth-quarter adjusted earnings to be 53 cents to 55 cents, below the consensus estimate of 58 cents. The shortfall is a result of lower wireless margins due to strong wireless subscriber growth and device upgrades. The company subsidizes many of the new phones placed.
  • The retail real estate investment trust (REIT) group underperformed, falling 2.6 percent, led by Simon Property Group Inc. A Barrons.com article pointed out that seven insiders have sold $14 million worth of company stock since mid-December.

Opportunities

  • There may be an opportunity for gain in merger & acquisition transactions in 2010.
  • The strength in the market since March 2009 could be an opportunity to eliminate weaker companies in the portfolio and upgrade to companies with better fundamental outlooks.

Threats

  • Should investors’ expectations for an improving economy not come to fruition on a reasonable time frame, it could be a threat to stock prices.
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