The Day Ahead: A Perplexed Market

 | Feb 27, 2013 | 8:30 AM EST
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There I sat, coffee in hand, getting in some last minute research before Fed chief Ben Bernanke was to give congressional testimony Tuesday. The robust market open was understandable after Monday's drubbing, given the heightened demand for lower-priced stocks after investors were reminded that Italy won't be exiting the eurozone. Yet the pop didn't seem right to me. In fact, it felt fake -- a function of simple repositioning ahead of soothing words of wisdom from the Fed chairman and economic reports that made sense.

Then Bernanke spoke, visibly nervous as usual -- but little more rebellious, too, since it's probably close to the end of his tenure. The market zigged and zagged and, by the close of trading, it had scored a decent enough gain to anger the bears.

So which is the real market? If you have a holding period in excess of a nanosecond, is there any reason to put the brake on buying what the brokers are selling? I contend that there is -- because, honestly, the real market is now a confused one, mired in a daily grind as stocks search for their true value.

Of course, this stands in stark contrast to what we saw January. The current volatility is warranted, as we are experiencing the first true mixed reads on the economy this year -- not only from government and survey reports -- and remember that "mixed" is not what is priced into stocks. From our friends abroad we are reminded that the global financial situation is precarious, backstopped by guarantees that are not improving fundamentals in actual economies.

So, for the moment, play things close to the vest. I'm not sure if this action is a pricing-in of the looming congressional sequestration and its delayed economic effects, or whether it's an expected steam blow-off due to less-than-perfect happenings that are really speed bumps instead of mountains. Either way, buying into a sizable up day doesn't seem a good strategy right now. Wait for the new trend to emerge.

Turning to the federal budget squabbles, here are several "sequestration panic plays" that are worth looking into:

IRS Furloughs

  • The Concern Equation: An increase in identity theft means more use of cash instead of plastic.
  • The Trade: Short MasterCard (MA)

This is a one-two-punch opinion. First, I was not enthused on the near-term potential of MasterCard shares after I chatted with management two weeks ago. Second, since the company lives and dies by card processing, a short-term shift to cash could create a mini-hiccup in its operating performance.

Closed National Parks

  • The Concern Equation: Closed national parks or shortened operating hours mean canceled trips and less need for camping gear.
  • The Trade: Short Dick's Sporting Goods (DKS)

"Hardlines" represent approximately 52% of Dick's' business, and it is obviously the largest component of annual net sales. This category includes such items as hunting and fishing gear. Lost in the Barron's write-up last weekend, moreover, was mention of very tough sales comparisons.

Health Centers Cut Off from Federal Funding

  • The Concern Equation: A lack of government money here means delays or cancellations in orders of medical supplies
  • The Trade: Short Cardinal Health (CAH)

Cardinal, through its medical segment, sells private-label medical supplies to a range of customers. This business only represents a little over 8% of the company's revenue, but it has almost a 2x greater operating margin than the core drug-distribution business.

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