The Day Ahead: Reading the Market's Clues

 | May 24, 2012 | 8:31 AM EDT
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Go ahead, give me 10 reasons to be constructive on those pesky things we know as equities (or stocks, your choice). I bet that for every bullet point emailed to me there would be a solid counter argument, which actually "makes a market" as us pros tend to mutter over a cold one of choice (Red Bull for me).

As far as I am concerned though, not much is compelling in this market. Why? To have a compelling stock, I have to be able to plug in numbers, developed through deep research, into a multi-factor DCF model to spit out a fair value estimate that is still viable two weeks down the line. That is the horrifically boring mechanics of it all. Optically, the market is not handing us any reason to attempt to win the "I Was the Bottom Caller of 2012" award and to bask in the bountiful rewards that follow.

Investment themes are not transferable among stocks in the same sector: I suppose the slick jargon is that this is a borderline stock picker's market (even the most ideal setups are showing they could be met by a nasty response), where specific companies with strong themes are rewarded come earnings time and, on a relative basis, in off-peak hours. Positive sympathy moves are not happening, however, as investors are afraid of misinterpreting one company's strength as transferable to another. For example, Movado's (MOV) profit guidance raise yesterday was firm-specific (years of restructuring, market share gains with flashier new product launches) whereas Zale's (ZLC) was weather/early holiday driven. Both stocks ended the session in the green. Genesco (GCO), on the other hand, partook in the same appetite for footwear fashion as DSW (DSW). DSW shares popped on Tuesday; Genesco's dropped on Wednesday.

Follow through earnings-related weakness: Polo Ralph Lauren (RL) gave back some gains after its earnings report, but alleged optimism on the outlook (it was a kitchen-sink, or so the market believed) was not priced in with a higher valuation the ensuing day. Fossil (FOSL) continues to trek lower following its horrid earnings announcement. A common theme to both companies is that nobody trusts the European outlooks.


It's still a "staples on" environment: Wal-Mart (WMT) on, General Mills (GIS), Kellogg (K), Kimberly-Clark (KMB), and Pepsi (PEP) not selling off, with profits then being funneled into beaten down sectors, say, industrials.

I realize that for basically seven weeks, themes that were foreign or laying dormant exiting the fourth quarter have become entrenched. Maybe that alone indicates that the market is overdue for a 5% or so relief rally, and not a single short-covering session. Or, it suggests that both domestic and international issues are so deeply rooted and concerning that people best learn to trade around them, given ranges of possible outcomes that will influence future earnings. I firmly believe that reading the market's clues is critical and there is value in not churning out ideas (depends on one's discipline, trader vs. investor) that have been oversold since the second week of April.

I putting together what I call "super silly value plays." In this category, I want strong businesses whose international brand notoriety and exposure is being overly discounted. A good example is Tiffany (TIF), which I outlined on Monday.

If you have any stocks on your radar screen that you believe fall into my category of "super silly value plays," shoot me a message on Twitter to @BrianSozzi.

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