The Day Ahead: Warming to Stocks

 | Jan 07, 2013 | 8:00 AM EST
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It seems woven into our DNA to believe that we are the best at everything -- and, in the stock-market patch, the dirt is fertile for braggarts. After all, there are always ways to weasel out of actually being wrong. Take these circulating boilerplate statements:

1. Gross domestic product growth in 2013 may total 2%, but risks are weighted to the downside. Try and spot the hedged bet here.

2. Fourth-quarter earnings estimates have been consistently marked down in recent months, so companies are prepared to beat, and stocks are headed higher. However, the very fact that estimates have been lowered implies "sluggish" business momentum, so the risk-reward scenario is "murky." Huh?

Listen, since the market's thunderous roar that commenced 2013, I have heard a great deal of wishy-washiness in terms of strategic advice, both for sectors and for the broad market. The only consensus I have identified is that imaginary debt ceiling "debates" will be quite worrying -- and, golly gee, don't buy a stock of any kind.

Hey, I truly appreciate the angst, because any investor, trader or stock promoter who boasts that they haven't been burnt in the past 12 months is full of malarkey. (Do send along that CFA-enforced track record.) Am I wildly bullish? Nope -- I'm selectively opportunistic, as I conveyed after the holiday.

But, at the end of the day, I am not managing your account, and I have no idea if the advice I've offered is being followed. So here's the deal: Enough rampant fear exists to sink the proverbial ship, yet Mr. Market's internal pricing machine doesn't have enough desire to discount that fear upfront. In order for you to get long stocks today, therefore, you need to jump over the following mental hurdle.

U.S. employment -- and the economy, for that matter -- is in a short-term holding period, likely before fiscal imbalances take hold of both the macroeconomic numbers, as well as statements and reports from publicly traded companies. The job market is neither decelerating nor accelerating as the trend improves in new manufacturing orders.

That, in turn, leaves the door open for at least January's data reads -- and the beginning of earnings season -- not to come in so dour as to completely obliterate the positive market vibes from fiscal-cliff mania. Perception is an important consideration, and we haven't yet seen that moment when key fundamental second-half challenges must be priced into valuations. Perhaps that process will happen in the second quarter, with a couple of earnings warnings from the early-cycle Nasdaq names that are falling into favor this month. (Macro fiscal problems theoretically should stunt the growth trend in new orders in the second half; so early-cycle stocks weaken first, while late-cycle companies try and duke it out on price-to-service first-quarter demand.)

So, provided that you can move beyond this mental roadblock, it may be appropriate to get long into month's end, if you haven't already done so. I continue to favor Nasdaq stocks for this particular call. Market players were underinvested in these stocks during the uncertain, latter stages of 2012, so that should unlock respectable initial guidance ranges for the new year. Conversely, limit exposure to small-cap equities that have enjoyed a hearty run from the November lows and are about to face a double-whammy of headline risks -- such as concerns on consumer spending -- and real risks. For an example of the latter, I can't imagine domestically oriented companies sounding bullish during earnings season.

Three Things to Discuss at the Morning Meeting

โ— "We've . . . seen something that just continued to grow as December progressed: customers very focused on basic needs" -- Family Dollar (FDO) CEO Howard Levine on latest earnings call.

โ— Apple (AAPL) is lagging the Nasdaq weeks before its holiday earnings announcement, and after a "disappointing" prior quarter. I will stick my neck out there, as I'm feelin' the stock into earnings on a combination of lowered market expectations -- on ratings, price targets and estimates -- and the tax-related dumping that went on in December. Any sign of ramping business productivity will be met with intense buying. Who wants to miss an Apple run into a year of likely new (not incremental) product introductions?

โ— NYSE short interest ratio is at 19.67% vs. a five-year high of 22.3%. That's a nice little indication of excessive bearishness into a week with minimal big-name economic/earnings reports.

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