Get Ready to Pounce

 | Mar 24, 2013 | 10:00 AM EDT
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Here is a hot tip: Obsessing about a single dominant theme in the market at any given time is borderline dumb.

I know, I know: You enjoy trading and trying to predict tops and bottoms. But, in reality, a far more consistent way of making money is by seizing on near-term mispriced opportunities while also wagering on the future -- a wicked combination. So I want to draw your attention away from talk that Cyprus will destroy the world and all of its inhabitants, and fixate instead on first-quarter earnings season, which is right around the bend with Alcoa's (AA) recent return to relevance. I fancy this will be a very tricky earnings season from the get-go -- so much so that proper positioning is a bit cloudy in the crystal ball that I'm waving my hands over. Here are a few items on my preliminary whiteboard.

First, stock appreciation has run counter to the usual Wall Street dog-and-pony show of downward earnings-per-share revisions -- which is happening as we speak. According to the three-month direction of global macroeconomic data and shareholder friendly announcements, many companies are poised to surprise handily on both revenues and earnings. The problem is that the market expects a nice bump in 2013 earnings guidance, as well, and that is unlikely to occur. In the current environment, an example of a solid guidance raise would mean a $0.03 per-share beat and a $0.05 raise in full-year guidance. That would suggest business momentum has continued into the second quarter, and that it could be sustained into the second half.

So there could be quality-of-quarter outcries as companies cycle strong first-half operating-margin gains and fluff their EPS with repurchases and tax-rate gimmicks. The market must see high-quality quarters this time around; anything to the contrary will be unacceptable.

Looking across the pond, the market also wants tangible improvement in eurozone new-orders trends to correlate with stability in financial markets. In 2012, the market said it was OK if a company's new orders were bumping along the bottom of a dour three-year trend in areas such as Spain, Italy and Portugal. For 2013, the baton must be passed to stability in overseas financial markets, in whatever small form, in the consolidated financial statements of multinationals. Caterpillar's (CAT) continued dreadful news and stock chart hint that still not all is fine and dandy abroad.

My sense is that, with the market near all-time highs, companies have not been aggressively repurchasing their stocks so far this year. Instead, they're waiting for the inevitable steam blow-off pullback in the spring. Unfortunately, people I talk to have already modeled in companies yanking sizable chunks of their shares outstanding from the market throughout the year -- so there is the risk of disappointment on even a less than superb quality quarter.

Meanwhile, China's data has been weakening, a trend that remains ignored. If you'll recall, many companies factored in a generally rosy China assessment for 2013 on their fourth-quarter earnings calls. Memo: Nike's (NKE) upcoming call will be telling in regard to its comments on China, given that it has been dealing with inventory excess issues.

By the way, in light of the Cyprus developments, one should pay attention to the negative moves in copper and aluminum prices. These tend to reflect bigger-picture global economic considerations for the short term, wherein perception may turn into reality, at least to a small extent. Price is truth, remember.

Aluminum -- Six Months

Copper -- Six Months

A positive worth mentioning is that, amid the typical earnings madness, the superbly executing companies should stand out -- because, in these cases, the addition of a strengthening U.S. economy will be like gasoline tossed on a fire. Those companies, for example Starbucks (SBUX), are the ones for which you should be willing to pay richer multiples. Heading into earnings season, we're looking at a rather probable breather in the broad market, and that mean more attractive valuations for these stronger companies. I am in the process of compiling a list of earnings-season plays. Stay tuned.

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