Be Wary of Current Leaders

 | Jun 07, 2012 | 4:08 PM EDT  | Comments
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Remember earnings reports? In another 30 days, we will be steeped in them. They are the single greatest predictor of stock movements, as the ability of inability of companies to beat sales and earnings estimates and to guide higher or lower when they report often controls whether a stock goes up or down.

If a company is able to beat expectations on its top and bottom lines, then it will likely go higher. If the company meets expectations the majority of time, it tends to fall ever so slightly. And if it fails to beat them or falls far short of them, then the stock is crushed.

One look at Tempur-Pedic (TPX), which has been cut in half because it missed so badly, or Men's Warehouse (MW), which estimates were very much out of reach, causing the stock to be hammered mercilessly, shows you the power of missed estimates.

This brings me to today's markets. Because there is almost a total dearth of company reports right now, we tend to forget their importance, even with surprises like Men's Warehouse and Tempur-Pedic.

But that doesn't mean stocks stop trading. We just switch to the macro, and shoehorn the micro, meaning we apply the broader themes to individual stocks and we reach conclusions based on deductive reasoning. We tend to use group or sector thinking because the big hedge funds often don't do the kind of research necessary to pick individual stocks, so they just bang down or take up whole cohorts based on a Fed speech or a Spanish bond auction.

These macro moves are often very wrong and very misleading. That is why you need to be wary right now of stocks that have moved higher during this rally, particularly those that are running and gunning on the prospects of a European deal or more Fed easing, as ridiculous as the latter might be.

This is why I have been urging a repositioning out of the largest groups in the S&P 500 and into the quieter dividend yielding names that have domestic security.

The other day, for example, we got a call from a brokerage house that Google (GOOG) might be seeing some weakness out of Europe, which is a huge market for the Internet search colossus. The stock got hit for a few minutes and then jumped up on Spanish bank bailout talk as well as a Chinese rate cut.

Well, isn't that stupid. First, a bank deal would not impact European advertising all that much. It wouldn't cure what's happened this quarter already. Second, China? Google left the Chinese market because of censorship concerns.

This is what is important: If Google does guide down because of Europe, the stock will be crushed even though it will be the same information foretold by the analyst's negative report.

Keep that in mind. Financials will be no different. Banks can't make as much money as they would like to when rates are this low and commercial activity is almost comatose. In five weeks, we will find out just how bad things are for these two groups, and I think they are plenty bad. The macro gunslingers just gave you a chance to trim and reposition into names such as Pepsi (PEP) and the American Electric Power (AEP). Believe me, a month from now, you will wish you did.

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