The Day Ahead: Torture!

 | Mar 04, 2013 | 8:00 AM EST  | Comments
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Stock quotes in this article:

spy

,

goog

,

aapl

Sad but true: The market is currently undergoing a stretch of agony. Up until a few weeks ago, the indices were frolicking in the woods, rifling off grandiose ideas of the future, to be disseminated by pundits. Now, with this mini-break of sorts, it seems as though the market has found its way into a torture chamber. The bears have returned, and with new training in psychological-torture techniques, designed to extract the market's innermost views. As for the bulls, they have forged a union and have ventured out in the search of information that could send the bears packing.

If you think this is not what's happening, wake up. Cut through the enthusiasm and the nonsense that's emanated from a couple of green days following those "rare" red sessions that took the liquored masses by surprise. You could begin this exercise by dialing in charts of the major indices onto the only third screen worth mentioning -- the expensive monthly Bloomberg terminal.

Look at the steam blow-off, and realize that this is the market's method for signaling that valuations are misaligned with medium-term economic probabilities. In order to justify a return to 52-week-high valuations, the market will need a more consistent stretch of mergers-and-acquisitions activity. (What happened to Merger Monday?) The market will need indications that companies are stepping in to buy back their stock at now-cheaper valuations, and it will need a sense that recent hiccups in overseas data are only hiccups.

If you're still in doubt, consider the following:

● Multiple top-stock breakouts have failed to hold firm. For these companies with fine fundamentals, such moves must at least hold their confidence, plain and simple. To see this in action, do a screen of high-multiple stocks with better-than-15% outlooks in earnings-per-share growth.

● Shares of investment banks, money-center banks and machinery names have ceded their sector leadership positions. They've been replaced by traditionally defensive healthcare and utility names: Both groups had the best percentage of new highs last week. In fact, the Dow Jones Utility Average has risen 6.7% over the past three months -- with a 6.3% climb since Jan. 1.

● Trading action has been sloppy around the Dow record of 14,164.3. In order for me to shy away from a cautious stance on the market, I'd have to see this record smashed on convincing volume. Its continued failure to do so does not inspire confidence; in fact, it slowly chips away at the bulls' argument.

● The SPDR S&P 500 (SPY) has risen just 0.5% since Feb. 20, lagging U.S. Treasuries.

● The SPY has also notched lower highs after it hit a five-year high Feb. 19.

* * *

Finally, here's a bit of analysis on a few nuggets I've recently posted to my Twitter feed.

Analysis: Add this to the list of things that support the notion of a broad mini-pullback. Despite their year-to-date appreciation, stocks still offer attractive dividend yields, as well as prospects for higher yields still, given that cash giveaways have begun to intensify among boards of directors. So when we see Treasury paper catching two weeks' worth of buying, it's a yellow flag.

* * *

Analysis: For the past few months, the ADP employment reports have generally been pushing up estimates on nonfarm payrolls. I would not be surprised if we saw that again this week, considering the positive slant of the manufacturing reports from the Institute for Supply Management and regional Federal Reserve banks. All in, my analysis hints at a nice positive surprise on the headline.

* * *

Analysis: What this fun fact demonstrates is the Street's continued bullishness on Google (GOOG), as compared with sentiment on its peer group – particularly for Apple (AAPL). I think you have to stay engaged in Google until the trade begins to weaken, or Apple until finally finds support in the market. In that case, the money should flow out of Google, probably at richer valuation levels than at present.

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