The Day Ahead: A Mad, Mad, Mad, Mad Market

 | Jun 14, 2012 | 8:30 AM EDT
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An overarching theme that continues surfacing in my analysis is this: When it comes to market direction, folks are doing a whole bunch of dancing around it. There is this fear of being wrong -- which obviously I understand – as folks emphatically state the S&P 500 could shed 10% in three months or surprise the masses by climbing this "wall of worry" that only exists in the imaginations of convicted users of financial jargon. Do I find everyone doing the #FearShuffle? No, of course not, because the market is nicely removed from its April peak, so people involved in managing money have to be telling clients to drop the "peace" sign to equities.

I feel as if a line in the sand has to be drawn. Each person must declare themselves a bull or a bear, and they have to do it right now. The office whiteboard should be overloaded with "what-if" scenarios to hop-step from being a bull or a bear, some of which likely to be tested this coming Monday morning. I hope that goes for you at home, as well, as you're whipsawed by interlocked markets and after-hours releases of material information that weighs on your decision-making in one form or another.

A solid framework underlying a bull or bear call, if you haven't made one already, should be rooted in facts, scenario analysis, and the study of individual stock price action. For example, I am a bear. I'm not a David Rosenberg Gluskin-Sheff bear, mind you. Rather, I am a run-of-the-mill bear who questions anything positive to the Nth degree and arrives at a negative conclusion that is held until new information suggests a fresh attack plan is warranted.

That said, it's not enough to determine yourself a bear. You can't just swear off the markets in this butchery, post-Facebook (FB)-debut world, and hold 99% cash, earning nothing to pass along to grandchildren. Instead, consistent management of the investment thesis must be carried out on a daily basis.

As an example, the intensity of my bearishness has increased lately -- because, quite frankly, we are dealing with a psychotic stock market. One minute it's smiling and holding a great conversation with a visitor, and the next it's showcasing raw strength by lifting a table by its teeth. What are the characteristics of a psychotic market? I'm glad you asked, because the good doctor is here to make a house visit.

 Four Telltale Signs of a Psychotic Market

1. Are dividend increases really a positive indicator? In a market that's functioning normally -- you know, as in the pre-computer-age markets that Ben Graham was alive to see -- a dividend increase would bring a smile to an investor's face. In a psychotic market, on the other hand, this is a worthwhile exercise. Consider whether dividend hikes by Target (TGT) and Caterpillar (CAT) are only designed to keep existing shareholders in the fold and bring in yield enthusiasts in a nervous market, and this before a slowdown in second-half earnings that could dent the stock price.

Note that Target raised its fiscal year guidance due to second-quarter upside, not on confidence that they'll blow away consensus figures in the back-to-school and holiday seasons. I will go yet a step further and suggest that, when you see upcoming dividend increases in this present environment, it may be signal cautious capital-expenditure plans for 2013 as a result of global macroeconomic risks. If this is true, it will alter the long-term free cash flow profile of the business.

2. Old hiding places no longer work. TJX Cos. (TJX) has basically traded sideways since April 27, Starbucks (SBUX) is down, Lululemon (LULU) is down and same goes for VF Corp. (VFC). Dollar stores are weakening. Old standby plays, those high-quality names that have defendable business models and fundamental outperformance to peers, are petering out. The market is telling us it can't determine what quality is anymore. Either that, or if it does know what quality is, it's simply unwilling to pay up to own it when investors are de-risking across the board.

3. Any intriguing stock moves are untrustworthy. Be truthful with the doctor. You surely do not believe the gains in transports CSX (CSX) and UPS (UPS) from June 5 are a sign the global economy could reaccelerate soon. The thought alone leaves these stocks, and others in a similar mold, spinning their wheels near important resistance levels.

4. Basic investing rules disappear. Stocks that have gapped down on earnings-related news are no longer being bought on the principle that "the negatives are now baked into the cake." Conversely, the lucky few that have delivered a well-received earnings report, such as Michael Kors (KORS) and Francesca's (FRAN), do not entice buyers in ensuing sessions.

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