The Day Ahead: Calling the Market's Bluff

 | Jul 08, 2013 | 8:30 AM EDT
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Bluffing is a must-have skill on the Vegas casino floor, in business-negotiation settings and definitely in investing. As the Godfather himself remarked, "Never let anyone outside the family know what you are thinking." The more I chat with those involved in the market and the more I crunch numbers on my own and analyze individual companies ahead of earnings season, the more it feels as if Mr. Market is a darn good bluffer.

Look at the cards recently dealt to Mr. Market, aka "The Dealer," unbeknownst to the individual sitting across the table -- the investor -- who has been folding their winning hands of short positions and cash.

Hand 1: 9% of all private-sector jobs are in the foodservice and drinking industry. Average weekly earnings for this group: 50% less than in other sectors of the private economy.

Hand 2: 598,000 of the 753,000 people that have landed jobs this year are part-timers.

Hand 3: The basic-materials sector was the third-worst performer last week, after utilities and telecom. That contradicts recently propagated views of a stabilized Europe and China.

Hand 4: The second-quarter profit at General Electric (GE) is likely to snap four quarters of accelerating growth.

But, as any good dealer knows, the bluff tends to work effectively only because a series of great hands have already been played and shown to opponents.

Don't get me wrong. I am skeptical about the sustainability equities' move off the June low -- especially given continued heightened volatility, tied to the rising yield on the 10-year Treasury. However, I haven't completely ruled out new long recommendations. They just have to be compelling opportunities coming from the proper sectors. For me, off-limit groups currently include utilities, telecoms, basic materials and industrials leveraged to heavy construction activities.  

Why am I open to longs? There are a few reasons.

First, the Russell 2000 rose 1.4% Friday -- even as defensive stocks, and names trying to entice with yield, sucked wind. The small-cap index has also outperformed since the June 24 lows.

Source: Yahoo! Finance

Second, stock mutual-fund inflows have totaled $200 million through June 26.

Third, shares of automakers and auto-part names remain strong even in spite of rising rates. This is telling of real economic momentum that could be maintained in a post-excessive-quantitative-easing environment.

Fourth, equities have recently acted as if they can handle 10-year yields in the 2.5%-to-3% range.

Fifth, the corporate insider-transaction ratio remains far inside bullish territory.

Finally, railroad stocks have been solid outperformers. That's been most notable in Union Pacific (UNP) blue on the chart below) and Kansas City Southern (KSU) (in red).

Source: Yahoo! Finance

Lastly, an Inquiry

You own stocks. You eat, sleep and breathe the markets. So I am curious: If the CEO of the company were sitting in your living room, what would you ask and why?

I personally wouldn't ask what you might think I would -- for instance, I'd lay off any questions about numbers, growth estimates and so on. But send me an email with your question, and I will share mine.



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