The Day Ahead: Sitting Tight in Bear Country

 | Feb 11, 2013 | 8:00 AM EST
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As investors, we should not be putting a great deal of emphasis on institutional investors and their whale accounts. The fact is, thanks to a robust research budget and contact network, these accounts have probably gotten in at a significantly cheaper level than you've been able to do. Do these "institutional accounts" move the market? Obviously. Is a read-through of Investor's Business Daily helpful in determining which stocks the big guys are nibbling? Yep. It also makes stock selection a wee bit easier when you study whale allocation in terms of sector and style.

But there are two primary parts of investing in which I put my faith: companies and their actual results. These are what set the path for whales their top accounts and price action, as this is a truth-teller in real time. It's then wise to take these focus points and bolt them on to a healthy inspection of the larger macroeconomic picture. I think that, if you approach the market in the manner, it's put up or shut up time right now.

With earnings season dying down, it will be the job of the macro developments to carry the market tally; the stories shared have to be strong enough as to counteract the return of global headline risk (loosely defined as "headwinds").

Bottom line: Here is why I have decided not to clear out of bear country:

● Consumer staples were the best-performing sector last week. It's as if investors reached for 10-year U.S. Treasury bonds near 2%, and equity yield, instead of expressing appetite for sending stock valuations higher. Boo.

● Upward velocity in the market has moderated. Granted, this isn't a major red flag. In fact, it's somewhat healthy -- if stocks kept climbing like a hot air balloon, it would raise the risk for a material 10% correction, as opposed to the miniature ones every dude on the Street is trying to predict. On the same token, it does tell a tale of buying exhaustion. The only catalysts I see from here until early March -- when we'll get the next employment report -- are negative ones that could feed the bear debate.

● The number of declining issues increased as the week progressed.

● I do not believe that January retail sales, February Empire State, and February Michigan sentiment will support investors hunting for a "new leg."

● France and Italy gross domestic product releases have the chance to toss fuel on the fire that Europe has refused as a headline risk.

Stock Research, Made Simple

Like a Transformer, there is always more than meets the eye when it comes to a company's earnings release day. Let's subject video-game publisher Activision Blizzard (ATVI) to prove this point. Its stock price soared 11% following the release of a very strong holiday quarter, fueled by its "Call of Duty" title and interactive plastic toys called Skylanders. The market seemingly loved the quarter, choosing to ignore commentary on Activision's 2013 release schedule that was a bit more cautious than the norm.

Naturally, the short-term minded Mr. Market also failed to price in the mother of cautionary comments below from CEO Bobby Kotick. This is what justifies spending 30 minutes reading an earnings-call transcript:

"Another thing that we are concerned about is, as you start to see Internet-enabled televisions and the App Store reach the television with more -- with a much larger base, it's very hard for us to compete against free. I think there are challenges even at the $0.99. And so to the extent that you see a lot more Internet-enabled televisions, we're going to have the start thinking differently about the content that we would deliver to those Internet-enabled televisions."

How I tore this apart:

● Internet-enabled televisions are available now, and Activision has seen early indications of an increased competitive threat. After all, you can download five family-friendly party games for $5.

● The above budding trend could lead to an all-out attack on the videogame industry's profit margins if, for example, Apple (AAPL) releases a television. Imagine touching the TV to download five family-friendly party games. That ease of use will almost make a casual gamer forget about traditional, packaged videogames, as well as console titles extended to wireless platforms. Remember, casual gaming has been resigned to handheld devices, with modest impact to the traditional gaming industry.

● Activision is currently unprepared for the seismic industry change -- which may cause it to be more conservative around the distribution of its free cash flow.

My top 2013 pick from the sector remains Take-Two Interactive (TTWO) due primarily to the future earnings benefit of "Grand Theft Auto 5". However, by no means is this a three-to-five-year buy-and-hold stock call -- not in an industry that is poised to get uprooted. This, by the way, is why I believe all three publishers will be acquired by traditional media companies during the next console cycle. (Their franchises could be used to release movies, for example.)

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volatility is quite low here, and we could see some downsides here in the short term. ...



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