By David Brown, Chief Market Strategist
Ho! Ho! Ho! The bulls continued to stampede over the bears in November with all style/cap segments up about 2% or more. Among the major indexes, Nasdaq was clearly the leader again, up 2.75% in November, while the big style/cap winner was mid-cap growth, with a strong 3.8% increase.
Nevertheless, the market continues to reward fairly evenly across all market caps. To demonstrate the difficulty in picking the best one, consider that small-caps lead for the trailing 12 months; large-caps lead for the trailing 6 months, and mid-caps lead for the trailing 3 months. Clearly, the market is sharing the wealth.
With regard to styles, value slightly outperformed growth in November but not by much. Value continues to have the best metrics over the past 12 and 6 months, but based on solid growth results for August and September, growth has led for the past quarter. Perhaps this push-back toward value in November was a sign that serious investors are considering the market a little 'toppy.' Clearly, they are not chasing momentum. The frequent sector rotation, which prevents one sector from becoming overvalued (witness, energy), has kept extreme overvaluation out of the picture for the time being.
As we head into 2007 in an up market, it is good to remember that throughout 2006, the best way to outperform the market has been to focus on the details of EPS metrics, such as gross profit margins, underlying cash flow, and the valuations applied to each. The market has continued to reward undervalued companies on the basis of either GARP-like factors or fundamental "price-to-whatever" ratios.
Moreover, lest we become too jovial in our year-end celebration, we must remember that continued uncertainties about interest rates, oil prices, terrorism, and political turmoil will accompany the market into the New Year.
We will review the market behavior again the second week of January. Meanwhile, on behalf of Sabrient, I would like to wish you the happiest of holidays and peace and prosperity for the New Year!
David Brown
