The Day Ahead: Be A Heat-Seeking Missile

 | Apr 04, 2013 | 8:01 AM EDT
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I have to admit I did not even look at the market on Wednesday until around noon. Further, there was a tardy-to -the-daily-market-party approach taken on economic release dissection. Why? I launched my own company (disclosure: first two recommendations are a buy rating on Toll Brothers (TOL) and a sell rating on Gap   (GPS) and put into practice a new-found discipline called: task prioritization.

There I was ignoring the crack-like nature of the market, choosing to hold phone chats with website coders. You know something? It felt great to step back and reset the market brain, which honestly was becoming cluttered with too many visuals that fouled up the thought prediction machine.

So you may be wondering what I saw upon an early afternoon return to daily market rituals. Here we have it:

An Automated Data Processing, Inc., ADP report that added another layer of cow dung to a yawning flame (fed earlier in the week by the Institute of Supply Management-manufacturing). After the ISM non-manufacturing was received, yet another burning bag was thrown into the pile. I don't want to make any harsh predictions prior to National Financial Partners (NFP) based solely on ADP. However, should NFP come in below the freshly revised lower consensus, the might of the Fed's easing process will be tested. Hard to buy the dips into Friday as the market is reacting harsher to negative economic surprises (and which are slower than prior month readings). In total, the budding economic data trend questions the mild P/E multiple expansion orgy (having decent earnings would help).

Discord inside the Fed rumblings intensifying ever so slightly, really making the next set of Fed minutes an eerie reminder of their April 2012 effect on the markets:

  • Cyclical and transportation stocks down in tandem.
  • Banks no support..

The market is ignoring robust home builder backlogs, sending sector lower on rate creep fear (or so I think).

Stock rundown:

  • Recession plays: Wal-Mart (WMT) and /TJ Maxx relative outperformance.
  • Dreadful stories get worse in a slowing second quarter economy: RadioShack (RSH) and Sears (SHLD).
  • Winning sectors are losers with higher rate perception: S&P Homebuilders, (XHB) La-Z-Boy (LZB) (and sadly, our aforementioned Toll Brothers).
  • China off: Caterpillar (CAT) and Joy Global (JOY).
  • Staples keep their bids: money is willing to sit on positions given still decent yields; nowhere else to go for now.
  • Spooky: almost don't want to see Apple (AAPL) trading in the green...its under performance has fed the market rally (those Apple profits have been nicely spread around...).

Forget the "don't fight the Fed mantra." In the present you should be thinking: "don't fight the more forceful hands of the real market." To me it feels as if we are poised to enter a mini-stretch where the market sheds a couple percentage points and the chubby bulls continue to pump while they do a little dumping behind the scenes. Don't be the one to get dumped on by being obsessed with the power of the Fed's odd easing; that obsession worked well in the first quarter, but it's a new ballgame today. The market action demands a higher hurdle rate to enacting new positions and a general lean towards reducing risk.

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