The Day Ahead: Wait, Huh?

 | Feb 12, 2013 | 8:00 AM EST
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No joke, y'all, for the first time in close to 20 years I took a 30-minute nap at noon yesterday! As is so often the norm, I had vivid dreams about the stock market, and of grabbing the hands of bewildered investors and guiding them to the profit land. However, towards the end of the dream, I magically found myself in front of a large drive-in movie screen. The picture being shown: Things You Have Seen in the Market Before, Part 590.

A couple key scenes from this flick:

● Stocks rise a fair amount over a prolonged period, then reasons for a profit-taking -- seemingly made-up reasons -- creep into the picture.

● Made-up reasons pivot ever so slightly to become valid reasons to head for the hills.

● Now the "new concerns," which started as dart-throw commentary by those seeking legendary market status, begins to impact stock prices.

● More faith is placed in the concerns, and stocks are having a greater number of down sessions in a given week.

You are likely quaking in your boots, this much is sure. A week ago you finally gathered the intestinal fortitude to dial your broker in order to buy some stocks -- or, at the very least, you swore this was the week that you'd venture back into the market with an initial 2013 purchase. As you sit here this Tuesday, there has to be a sense of confusion, perhaps borderline panic. I am tend to hold contrariam views, so I understand the emotional volatility that transpires when it comes to an asset class that has burned your rear-end in the past.

What you have to be fully aware of is the shift in market sentiment occurring as we speak. The bulls hate to acknowledge this stuff is percolating underneath the surface of euphoria, but it is, and it's a movie that I have watched over and over again through the years of praying at the altar of Mr. Market. Here is a helpful checklist to flesh out the opinions I am expressing:

Whether to "buy the dips" talk has replaced "buy the breakouts" talk. (By the way, if you don't analyze language in the marketplace, begin. It's a useful unscientific tool.)

● In the S&P 500 (SPY) 63 companies lowered their first-quarter earnings-per-share estimates, and only 17 raises. This is the type of ratio that went lost in the sauce cooked by the bulls in late January/early February, but will garner more attention as the market's breakneck pace of advance cools.

● Italian bond yields are at an eight-week high and the market has yet to notice. The breakage of the link between renewed EU financial market/economic stress and the U.S. stock market is an indication of complacency. In other words, the market is presently blind to the resurfacing of risks to S&P 500 company sales/earnings from still dead debt troubled EU end markets.

● The S&P 500 is trading on a 15x reported earnings P/E multiple compared to the 13x 2012 average. On a standalone basis this means a hill of beans, but combined with downgrading corporate profit estimates, it's an overbought signal (market is too optimistic on future earnings streams.)

S&P 500 Homebuilding Index (XHB) peaked on Jan. 28. A couple of the names I track including Lennar (LEN), Pulte (PHM), Hovnanian  (HOV), Toll Brothers (TOL) and Ryland (RYL) are acting horribly. If this isn't a red flag I don't know what is seeing as housing continues to be looked at as the savior to 2013 U.S. GDP.

The larger debate worth having is whether this is straight consolidation in the markets, essentially keeping the suckers in the game, or early innings of a correction that the smart money smells (they are not the suckers, in effect they are the ones selling at the moment). Not too sure, but today is day four rocking the bear mask.

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