It’s taken some time to see it, but the benefit of a low-volatility and high-value (low P/E) portfolio is starting to become evident. Not only have we outperformed the rest of the market since the official inception of the sandbox portfolio back in June [we’re up 5.8% versus the market’s 4.3% gain], we’ve done so without being whipped around like a lopsided yo-yo. Here’s our performance.

As for the current portfolio, we’ve nothing to not like, save one…. SeaChange Intl. (SEAC). It’s in the hole 16% - a dip into the red that happened in one day, not giving us a chance to make an exit. The good news is (and it’s dubious) that SEAC hasn’t moved any lower since the 9/3 tumble, hinting that the bulls are still testing the waters.

Capstead Mortgage (CMO) is the only other holding in the red right now, and is a similar story - most of the dip came in one day, without warning. With only a 6% loss so far though, this one’s not nearly as problematic.

Stay tuned for any potential exits on either of those two. With that being said, also stay tuned for any exits on our higher-profit positions as well.

With what appears to be a brewing pullback for the market, it will be to our advantage to think defensively here, locking in profits before we give a great deal of them up. There’s nothing screaming right now, but with Westell (WSTL) stagnating after a 48% run, and with AXT Inc, (AXTI) approaching the 40% gain mark, we’ve got something to protect. Even some of the smaller winners are big enough to start pre-emptively taking off the table. So, if things deteriorate further, look for sell alerts.

And almost needless to say, there’s nothing new we want to add to the portfolio (though the scouring is an ongoing exercise).

News-wise, there’s not much to worry about. LaBarge (LB) won a $1 million contract (sub-contract, actually), though that means little for a company that did $289 million in sales last year. Everything else was just conference call announcements.

Transcend Services (TRCR) announced it will be hosting its Q3 conference call on October 28th (Thursday) at 11:00 am EST. The U.S./Canada call-in number is 800-815-8193, or 706-643-2724 for the international dial-ins. Enter the conference identification number 14399961 and, if asked, identify the conference name as Transcend Services and the leader name as Larry Gerdes.

CenturyLink, Inc. (CTL) will host its third quarter 2010 earnings call on Wednesday, November 3, 2010, at 10:30 a.m. CDT. Investors can access the call by dialing 866-818-1393 five minutes before the call begins. The conference call will also be transmitted - live - over CenturyLink’s Web site at ir.centurylink.com.

To keep timely tabs on what’s going in or out of the sandbox portfolio - and to receive exclusive market commentary and stock picks - sign up for the free Micro Cap Press newsletter today.

We’ve spent a great deal of time recently looking at emerging sector leaders and new sector laggards. Though it’s an important day-by-day analysis, it’s not the only one. Just as telling - but longer-term in nature - are the underlying valuations for those sectors….. those numbers tell us what ’should be’ happening.

Since all of this data are pieces to a larger puzzle, here’s a look at the complete fundamental snapshot of the large caps for each major sector; the small and mid-cap numbers are forthcoming.

The advantage to this simple chart is its completeness. Most investors would consider P/E ratios alone, and leave it at that. By adding growth and margins to the mix, one can get a much better feel for the overall health of a particular grouping.

Take energy for instance. With a trailing P/E ratio of 13.3, most would consider the group to be overvalued by the sector’s long-term norm. The thing is, with the speed at which energy earnings are growing again (the PEG ratio is a rock-bottom 0.52), the slightly frothy price may well be worth it. Though not great, net margins for the energy group are an average 8.6%…. well enough protected barring a deep, deep dip in oil/gas prices.

Also on the higher end of the spectrum are financial stocks. At first glance the trailing P/E of 18.40 seems like a small fortune, considering the sector has been back in the black for the last six quarters…. with the last four being much stronger than the first two of those. When you look at the PEG number though, like energy, the higher price for financials is justified; wide margins are the kicker.

One of the more troubling areas are discretionary stocks, which will actually come as a surprise considering how well they’ve performed over the last eighteen months. Oddly enough, they’ve yet to be ‘worth it’, and don’t appear to be on track to be ‘worth it’ anytime soon. Oh, on a case-by-case basis there may be a diamond in the rough within the consumer discretionary sector, but they’re few and far between.Consumer staples stocks are telling the same overvalued story.

Of all the sectors on the grid though, technology and healthcare are actually the best all-around values. Their P/E ratios are near average, but both groups have been growing and should continue to grow earnings faster than their P/E readings would suggest is deserved (the PEG measure is under the 1.0 mark, which is the rule of thumb ‘norm’). The icing on the cake for both sectors is pretty wide margins, which means profits are protected even if the economy throws a few more curve bells.

The matrix holds other clues and hints, which we may explore in future comments. At the very least, however, you can use these numbers as a benchmark for any of your individual picks.

Arm yourself with these important details…. which you certainly won’t get anywhere else. Subscribe to the free Micro Cap Press newsletter today.

Financial stocks blazed the trail last week, advancing an average of 5.7%. What’s interesting about the sector’s move, however, is how well distributed the rally was among all the industries. Normally there’s a standout that ends up scoring near the top of the ranks of the industry contest (see below), but in this case none of the top five industries were a financial grouping. It’s a sign of strong breadth from the sector’s gains.

At the bottom of the barrel were telecom and utilities…. two groups that had been at the top of the heap for the last month or so as defensive-minded investors fled to safer havens. Though the two started to lag again last week, don’t give up on either yet… each is still a serious laggard for the last 18 months, meaning they each have plenty of ground to reclaim as the sector rotation effect continues to play out.

Sector Ranking

On the industry-level front, with the exception of motorcycle manufacturers, there’s probably something more to the leading industries from last week [sorry, no long-term data for the paper products index]. Each has been a laggard for the better part of the year, but each is also showing an itch to continue accelerating now.

As for the losing side, seeing multiple healthcare industries at the bottom of the rankings doesn’t bode well for either of those arenas, nor the sector at large.

Regarding packaged foods and distillers, bear in mind that staples fell out of favor last week as visions of bullishness and rapid growth once again danced in investors’ heads. It’s the kind of thing that puts staples and consumables on the backburner. Don’t read too much into the lagging just yet.

Industry Ranking

The mainstream media is never going to give you these kinds of details, even though it’d details like this that make a huge difference in your bottom line. Subscribe to the free Micro Cap Press newsletter today, and start boosting your bottom line by getting this kind of information on a regular basis.

Last week was indeed the whirlwind week we warned of. And, even the mediocre news was interpreted as bullish. The market soared accordingly.

Income and spending were both up, by 0.2% and 0.4%, respectively. And, consumer confidence came in higher as well as much better than expected (to 53.5). Factory orders were up a tad as well, by 0.1%.

On the housing front, the improvement was solid. The Case-Shiller index showed a 4.23% increase in home prices, and pending home sales popped by 5.2%.

Initial claims fell a tad (-6K) to 472K, as did continuing claims, to 4456K. Private nonfarm payrolls grew by a better-than-expected 67K. Hourly earnings also topped expectations with a 0.3% increase. The unemployment rate inched higher from 9.5% to 9.6%, though in some regards that’s a healthy sign of an increase in job-getting optimism.

Economic Calendar

The coming week will be much less eventful. August’s consumer credit levels will be unveiled on Wednesday (-$5.5B expected). New and ongoing claims will be released on Thursday; look for little change. Wholesale inventories should show a 0.5% increase on Friday.

Overall, as investors start to get comfortable with the fact that the incredible yoy growth was a thing of the past - and that the current yoy numbers aren’t “slam dunk” comparisons - expectations have been worn down to something more reasonable. And, now that it’s becoming clear that the slow-down doesn’t equate to a contraction, the bulls have a fighting chance again.

Get the ‘bigger economic picture’ delivered to your mailbox on a regular basis, just be subscribing to the free Micro Cap Press newsletter.

Over the last several months - going back as far as late last year - we’ve been pounding the table in favor of three sectors…. utilities, telecom, and energy. Though a huge runup in Q1 and a devastating pullback in Q2 trumped the idea of worrying about sector leadership, now that the dust is settling, we can again turn our attention to spotting emerging leaders. Care to guess which sectors are emerging as those leaders?

While energy stocks have been a letdown since we took interest in them, telecom and utilities have indeed made their way to the head of the class since the early-July bottom. And interestingly, they really didn’t yield during the most recent dip. In other words, this leadership has been quite unwavering.

The chart below puts it all in perspective. Though transportation and industrial stocks were the big winners of Wednesday’s bullish madness, over the past two months or so, telecom and then utilities have been the market’s best sectors. Staples was a respectable third, but only utilities and telecom stocks are back in the black for the timeframe.

And energy? Though not at the very bottom of the pile, it’s close to it - thanks to a minor contraction in the price of oil that was interpreted as a major decline in investors’ heads.

Anyway, the chart is what it is, and it doesn’t lie….. 2009’s absolute worst performers are starting to emerge as the best performers, at a point in time when nobody expected it. One can assume these trends will stay in place until we get the same visual clue that their momentum is waning.

You’re not going to get this kind if insight anywhere else. Sign up for the free Micro Cap Press newsletter and start getting it on a weekly basis.

In Saturday’s newsletter we posed the bullish possibilities for the S&P 500, and we mirrored those thoughts on Monday with the equivalent outlook for the NASDAQ. In neither write-up, however, did we mention a bigger and more ambiguous reason that it could be to be a bull here…. too many new lows.

What? Too many new lows? Yes, it’s a little counterintuitive, but it’s been demonstrated - including very recently - that when the NYSE [or the NASDAQ for that matter] sees a big spike in the number of its stocks hitting new 52-week lows, it’s more often than not a significant bottom.

And how many new lows is the magic number? That’s the ambiguous part - there is no magic number. That determination is made by sight, gut, feel, and opinion.

We’d never argue that the lack of a scientific approach leaves the door open for potential misinterpretations. That’s why this clue is best used in conjunction with other reversal clues.

On the other hand, it’s not hard to see an unusual number of news lows when the data is charted.

Enough talk. More analysis.

In simplest terms, we’re looking for a spike in the number of new lows that indicates a blowout day ….a day that’s so incredibly bearish that it can’t possibly be sustained. Don’t laugh - it works. Take a look at the chart below. For all four of the prior bottoms and bounces (even the ones that were short-lived) there was a clear surge in the number of new NYSE lows. Yes, some were more trade-worthy than others, but each of them did dole out some trade-able bullishness.

The challenges become clear with just a brief study of the chart…. it’s not always clear that the new lows from the NYSE have ’spiked’ until after the fact. For instance, the reversal hint from 6/8 was pretty distinct, but the one from 5/25 was formed only after the (roughly) the same number of new lows was hit for the three prior days.

Still, it’s worth the effort given the risk/reward scenario of such an analysis; it’s timely and telling far more often than not.

Now fast forward to today; despite hovering at new multi-week low levels, we’re not really seeing the same number of new ‘blowout day’ lows that often materializes on a capitulation day. Oh, we saw that number back on 8/25, but we’re not seeing them now.

In other words, the pivot may have actually been back on the 25th when we saw 158 new NYSE lows… a distinctly unusual number at the time. The market just hasn’t yet been able to get any upside traction. However, that may be because making a bottom isn’t always an event - sometimes it’s a process.

In any case, it’s a chart all traders should see (even bearish ones) given the potential upside move that’s brewing. Yes, the last four cases were all only short-term bullish moves, but all big trends start out as small ones.

And here’s a tip to help spot the bottoms flagged by a spike in the number if new lows: look for a reversal bar like a doji or hammer. Almost every single new low spike that pegged a rebound occurred simultaneously with a reversal bar.

You’ll never get this kind of insight or be shown this kind of chart by the mainstream media. Start getting this information - and more - on a regular basis by subscribing to the free Micro Cap Press newsletter.