The Day Ahead: Serious Dents Remain in the Bull Case

 | Feb 28, 2013 | 8:00 AM EST
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The at-large issue this week is the sheer joy the market bulls are expressing after Monday's beat-down. Exuberance oozes from their mouths, their chests red from multiple self-induced poundings. Heck yeah, they are jacked for being correct -- for two days. Strange how this all works, no? Listen, I have no axe to grind with the market. I call this stuff as I see it -- and, to me, the investing landscape is evolving in a manner that seriously dents the bull case.

This doesn't mean the market is poised to go to hell in a handbasket. On the contrary, it places more of a premium on individual stock research, including locking in on key technical levels and doing valuation sanity checks. It also warrants a healthy understanding that the next three months of global macroeconomic data won't completely support present valuations. As these reads trickle into the picture, the market will experience an increasing number of triple-digit red sessions in the Dow and then seemingly get them back -- but not really.

I'm not, by any means, offering a get-out-of-the-market plea. But when I see some of the below items, hey, I am going to mention them as a reason why you should not buy stocks hand over fist. One can't blame Italy for all of these choice market happenings!

● One-month S&P Airline Index

● One-Month Russell 200 Index

● One-Month Philadelphia Semiconductor Index:

● One-Month Dow Transports

● Draw a 10-day moving average on individual stock charts. If the appetite for stock were truly strong at these lower levels, why is hasn't that red line been crossed yet?

● Why are Expeditors' (EXPD) earnings stinking up the joint?

● Why is Dollar Tree (DLTR) confirming the negative aura of Wal-Mart's (WMT) pre-recorded earnings call?

Target's (TGT) credit-card business is lagging its debt-card business. I think the market's valuations are such that it's expected consumers will re-leverage due to an increased wealth effect -- that, for investors, this is not open for debate.

J.C. Penney (JCP) had a good Valentine's Day, but was sluggish on the long Presidents Day weekend.

J.C. Penney: Woof

For some background, since January my rating on J.C. Penney has been a sell.

For some context, out of 20 Wall Street analysts with coverage on this stock, only seven rate it a sell; three rate it a buy.

With that said, the move in J.C. Penney shares was decidedly lower, and it was the right move. Over the past four weeks, CEO Ron Johnson has done everything in his power to talk down the quarter -- which we knew would be bad anyway. Unfortunately, his usual words of inspiration are finally falling on deaf ears.

The fact is that it remains very hard to warm to J.C. Penney as a first-half 2013 turnaround story, given that its cash is being severely hampered by that turnaround. Moreover, there was nothing in the quarter to ignite confidence. Same-store sales were down 31.4%, worse than consensus around 30%; online sales declined 34.4%; and there was material erosion in gross margin. The company is more than 12 months into the reorganization; where is all of this clearance inventory coming from?

Sure, one could say this quarter comes before the new pricing-strategy shift that, it appears, is enticing customers ever so slightly. But the bottom line is that this is not the quarter that provided a bridge to hope and supported the stock's strength prior to the release.

I want to believe in J.C. Penney. The stores and overall environment are starting to win me as a convert -- as are a few of the facts mentioned in the earnings call. However, there is no need to jump the gun. Let the market dictate when the proper time is to add this name as a longer-term holding.



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