The Daily Dose: Poor Man's Market Outlook

 | Apr 21, 2014 | 10:30 AM EDT
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A sense of calm has returned to the stock market. Full thanks to Fed Chair Janet Yellen for restoring the only reason to buy stocks at still-inflated valuation levels subsequent a brutal selloff. Large institutions continue to have the opportunity to lever up on the dirt-cheap to buy momentum stocks, and that has the effect of attracting those who are watching from afar to buy across sectors blindly. 

However, the latest earnings reports do not lend support to the cock-eyed bullishness that is permeating the stock market once again. That means that one should approach Facebook (FB) and Tesla (TSLA) with a heavy dose of skepticism, even at cheaper valuations compared to one month ago. In fact, looking at VIP earnings reports from the likes of Coca-Cola (KO) with those in the industrial sector, it's apparent that revenue quality isn't deserving of an over-reach by investors.

I believe that to put money to work at this precise moment, a company has to wield a serious positive fundamental catalyst in the form of a highly profitable acquisition adding to the financials, multiple new product releases or price increases in Latin America that counteract the headwinds of foreign exchange (no large negative impact to volume). Even if the setup is there, for example on Chipotle Mexican Grill (CMG), the market may decide to sell (like Chipotle) on earnings days or days post earnings because of challenges nobody was anticipating (instead of giving the benefit of the doubt), such as the pockets of inflation that are now appearing (beef, etc.).

As we stare down the barrel of peak earnings-season madness, I would be weighted at least 50% in cash and be prepared to reduce that somewhat bearish stance at the emergence of positive themes that are ceasing to materialize. Here is a tidy list of things that weird me out about the stock market right now:

  1. The Shanghai stock market is at a 10-day low against a rising sea of analyst commentary that China's economy bottomed in the first quarter. My inclination is to side with Mr. Market, as companies that do business in China are telling me of higher than normal inventory levels that are constraining their overall profit margins. The exception to this theme is Starbucks (SBUX), which continues to pack in the Chinese consumers.

  2. Rubber prices are at their lowest since 2009. Volumes in autos, as seen at the railroads, are moderating on a sequential basis. Something doesn't add up.

  3. Key leading ETFs, the Market Vectors Retail ETF (RTH), Consumer Discretionary SPDR (XLY) and Russell 2000 (RUT), continue to lag the Dow, S&P 500 and Nasdaq.

  4. The quality of first-quarter earnings raises questions about the rationale for paying up to own alleged "growth" or "value" names. The margin expansion isn't there, and the softness is being masked by share repurchases. This could easily be viewed in S&P 500 companies reporting revenue and earnings-per-share growth year over year that is tracking in line to trimmed consensus estimates on the first quarter. To pay up to hold a stock, you want to see companies trounce estimates and do more than reaffirm their full-year guidance ranges.

Stock Stuff

I continue to be positive on Dick's Sporting Goods (DKS) (the stock is down 10% in the last month). I'm getting good feedback from contacts on traffic and conversion trends, no matter the weather conditions. You could pair this long with a short on Best Buy (BBY). Aside from having the U.S. stores' president depart last week (never a welcome sign, but especially a bad sign intra-quarter), I think the quarter has been very challenging for the electronics category.

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