Courtesy of Scott Martindale, Senior Managing Director, Sabrient
The Financial sector soared on Wednesday, continuing to lead this impressive market rally. It was by far the strongest sector, up +2.7% for the day. This is all about the news coming out of Europe, which is encouraging at the moment. But we won’t know much more until the G20 summit, which is scheduled to begin on November 3, when French President Sarkozy and German Chancellor Merkel have said they will release the details of their plan to ease the European debt crisis.
Despite recent performance, large cap financials are still down around 20% year to date, as the big institutions have been hit hard. As reflected in Sabrient’s SectorCast ETF rankings, analysts remain cautious for the Financial sector. Nevertheless, the big caps have been at the forefront of the latest rally, which has taken the market back to the top of its 9-week sideways trading channel. Although the market might need to stop for a breather here, valuations remain compelling, assuming global recession can be averted.
Despite widespread negative sentiment, depressed housing, poor U.S. auto demand, a high CBOE put/call ratio, high volatility (VIX), and extreme bearishness among newsletter writers, it appears that third-quarter 2011 GDP will likely show real growth of 2.5%, which is well above the first-half growth rate of less than 1%, and better than recent consensus forecasts. Consumer spending, improved trade deficit, recapitalization of European banks, China’s resurgent PMI, and continued strong U.S. corporate profits are all contributors to an improved outlook. The spread between S&P 500 earnings yield and corporate bond yields is at a multi-decade high, making stocks look like a bargain.
And now earnings season has commenced, so the next couple of weeks will be giving us new insight into the state of the economy and companies’ forward guidance. JP Morgan (JPM) and Google (GOOG) are notable bellwethers reporting this week. Some think that analysts have been overly cautious, so if true, we should see a lot of upside surprises.
I want to mention that Sabrient recently acquired Gradient Analytics, which produces “deep dive” research into forensic accounting, earnings quality, and anomalous executive behavior (in equity incentives). Gradient made a great call early last week on Rockwood Holdings (ROC) after the CEO made a couple of large exercise-and-hold transactions. Since then, ROC is up over 30% in just over a…
