The Day Ahead: Have Rally Destruction Seeds Been Planted?

 | May 14, 2013 | 8:00 AM EDT
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Really, the stock market finished a session lower? Is that even possible in this era of permanent open market operations? Well to put it mildly, it's uber difficult to extrapolate a hill of beans from 26 points in the red for the Dow, which was a bounce from the depths of the abyss on the day (what else is new...). Going through the market sector by sector to make sure we weren't on the verge of mid-week destruction, this was my feel:

  • Minor profit-taking as the market digests sprouting seeds of concern.
  • No definitive confidence in said seeds morphing into a major equity pullback.
  • Bids remain concentrated in U.S. centric sectors that are dependant on consumer spending trends.
  • The market is content to sit on winning hands; the rotation from defensives isn't exactly so noticeable. For example, countless papers continue to reference defensives (utilities, etc.,) being the hot area of the market.

Combine these bullets and presto, we are inside a market likely to stay in autopilot mode. However, as I wrote on Monday, one definitely should be cognizant that markets don't climb to the moon forever. The list of things to be tracking, other than weather patterns for a black swan type hurricane this summer, has to be in the growth zone. Don't sit on your hands and become lulled into sleep, that's what losing investors do. Here are a few added items I am wrestling with:

  • Isn't global GDP forecast to re-accelerate into fourth quarter 2013? That is the word on the Street. Then why have earnings estimates for S&P 500 companies been marked down by 0.3% in the last month alone? Something is fishy. The market has valued companies not for a euphoric future, but certainly for better micro and macro conditions than is presently being shaped by the sell-side. A positive in this backdrop? Best in breed companies truly shine, namely a Mohawk (MHK).
  • The land of subpar is being shoved in our collective faces. Corporate America is using the promises of the Fed to whip investors into expecting mediocrity (only to surprise in an earnings season); the negative to positive guidance ratio at 4:1 is at a multi-year high. Average since first quarter 2005: 2:4.
  • Where is the breadth? This was my thought in seeing only three of 10 S&P 500 sectors logging revenue beats this earnings season.  In an economy experiencing a "virtuous circle," I think positives in say the housing and consumer sectors would be translating to a greater degree than on display.

Quickly Forming Themes in the Market

  • Bernanke hints at a tapering in easing at his May 22 speech. Full blame to this opinion is on the collection of "upbeat" jobs data and April retail sales.  Oddly this may benefit a JP Morgan as net interest margins would be perceived as having troughed. Admittedly I am toying with this thesis.
  • Estimates on China GDP for the rest of 2013 are too high given the one month data trend. Unfortunately, globally exposed entities are not valued for a situation of two more quarters of negative China surprises. My eyes are on Nike (NKE); any intensification of a China slowdown will cause a return to bloated inventory levels that only recently were normalized.
  • Back to school shopping season will be above forecasts embedded in analyst models. I have reservation on this until I dive into first quarter 2013 retail earnings calls shortly, but do believe the plunge in gas prices will be helpful (if they don't spike in the summer).



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