The Day Ahead: A Spate of Ignored Negatives

 | Jan 31, 2013 | 8:30 AM EST  | Comments
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These days I really do find myself torn between two opposing worlds, each with their own specific allure. One is the attack-dog-type stock research I thoroughly enjoy. Here, it would be wiser to stick with principles I've learned and ignore anything resembling the word "macro," including a Federal Reserve statement. The other is the rationalization of newsy events for purposes of column-authoring. Here, a Fed rate decision overshadows whatever research I've done, because every second the market is open for business is a moment to cover new clues on the next direction for stocks.

Amid this, throughout this weeks-long rally I have dissected the merits behind numerous market-top calls. doubted the strength and sustainability of corporate earnings, I've watched the Street lick up lame macroeconomic data -- which is apparently OK as it's not super lame. Now we have the Fed piping in its two cents into a market that is looking for an excuse to blow off some steam -- honestly, I could spot a bunch of key stocks I follow that appear to be showing exhaustion.

Since the Fed is in fact the engineer of the stock rally, the question is: Did these policymakers' contribution alter the backdrop for stocks at the start of February? Let's compile the evidence.

Growth 'Paused'

With the use of this terminology, the Fed has brought forward fear that the pace of growth will lead the way to another gross domestic product contraction in the first quarter. The market is supported by a completely different logic.

While we are on this topic, I must give a head-shake to people stripping out items from the dreadful GDP report to fit their own long book. Government cutbacks negatively influence the economy and should not be disregarded, especially since they will be with us for the foreseeable future. Same goes for a major storm – those Generac (GNRC) generated were an unplanned, charged expense that is still being paid off.

'In Large Part'

In other words, the sluggishness of the economy is not entirely due to weather, and rears its ugly head once more despite extra, extra, extra accommodation. The market will interpret this as diminishing returns to the Fed's #EaseOn mantra -- a counter to a belief, currently embedded in stock prices, that the central bank is a persistent pumper of higher-risk asset prices.

'Unemployment Gradually Decline'

This is simply not the scenario the market has priced into stock valuations -- which, on a price-to-earnings basis, are nearing their average since 1954. It's also opposite to the rising optimism on employment, based on initial-claims data. Broadly speaking, the Fed is utilizing its market muscle to foster stock gains that may not be well-deserved, in "large part" as the real economy continues to underwhelm.

 So this is the action plan, since I know you are probably feeling rather cornered after cashing in those CDs and phoning the broker for the first time since 2009. Maintain your core exposure to stocks but take profits on positions that have run, and don't make too many of those extra trades designed to maximize the return of your portfolio. In my view, this is an appropriate action as we head into the slower news month of February -- and in light of the recent spate of developments, which have been slightly more negative overall vs. mid-January.

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