What the Market Wants: Flight to Where?

Courtesy of David Brown, Chief Market Strategist, Sabrient

Flight to Where?

By David Brown, Chief Market Strategist, Sabrient Systems

Last week’s rally gave us the first positive week in a month, and it continued today, with the S&P 500 gaining a robust +3% in one day and barreling through the theoretical ceiling of 1200, to close at 1210.

The reasons for the rally? Hard to say.

Based on the deluge of worrisome news of last week, one would think that a rational market would flee to safety. Turbulence continued in Libya; violence worsened in Syria with no end in sight; ditto for Iraq and Afghanistan; and the euro weakened further when it was revealed that Finland demanded collateral for guaranteeing the bailout loan to Greece.

Closer to home, two chaotic events struck Washington D.C., but this time, rather than Congress, it was the startling earthquake and a damaging hurricane. And then, there was Fed Chairman Bernanke’s speech at Jackson Hole, Wyoming. His remarks were initially perceived as negative, with the market immediately dropping 200 points, but it quickly recovered and kept on going up.

Worrisome economic reports would also suggest a flight to safety. Jobless claims increased last week; the first revision to the second quarter GDP fell from 1.3% to 1; consumer income rose only +0.3% versus an expected +0.4%.  

Here are the market stats.

But the market paid scant attention to all these worries. Small-cap Growth, the antithesis of a flight to safety, led the cap/styles, up +6.7% for the week; Large-cap Value, the epitome of a flight to safety, was the worst performer at +4.0%. As for sectors, if you’re worried about the state of the economy, you’ll flee to safe sectors like Utilities, Consumer Non-Durables, Energy, and Health Car — and if you’re optimistic about the future, you’ll head to Capital Goods, Technology, and Basic Industries.

In fact, the flight-to-safety sectors were at the bottom of the heap while sectors that reflect optimism were at the top, with Capital Goods, Technology and Basic Industries all gaining more than +5.0% last week.

Is all this just the market’s lying eyes? Or did it glimpse silver linings in the week’s worrisome news.

Consumer spending rose +0.8% despite the modest gain in consumer income, eclipsing last month’s -0.1% and the expected +0.5%. Neither the earthquake nor the hurricane was as bad…