The Day Ahead: An Exceptionally Odd Market

 | Aug 09, 2012 | 8:30 AM EDT
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By no stretch of the imagination have I ever thought the stock market was not weird. Even when I started career in financial services in late 2003 -- before subprime loans became all the rage with suspect salesman -- there was this weirdness that stocks always went up no matter what. Maybe I wasn't covering enough companies or didn't know how to connect the dots, but those days of yesteryear were filled with more green than nasty red. I loved green on the screen; it kept the boss from tearing us a new one or ripping a computer from the wall and throwing it 15 feet.

These days, when I visualize the puts and takes to the market, there are any number of reasons for it acting like a weirdo. The problem is that the weirdness is bad for the passive investor -- and it's only good for a trader if they're fully utilizing a range of tools beyond analyzing chart formations, as the Charles Schwab commercial would have viewers believe is possible. By the way, the very reason the market is so weird is because that describes the world, as well.

Lululemon (LULU): The stock is $21 off its May high -- and yet, the company is primarily domestic, insulated from European malaise, and geared toward higher-end consumers. The company doesn't operate in tourist locations as Tiffany (TIF) and Saks (SKS) do, so spending should be solid, no? Theoretically, the market should be lining up to pay a premium to own a superior earnings growth stock at a cheaper valuation. It's perfectly OK that the market is watching from afar -- I have been a bear on the stock myself. But the underperformance is weird, given the information we have garnered this earnings season -- that is, domestic names have won, while multinationals have not.

Dollar General (DG), Family Dollar (FDO), Dollar Tree (DLTR): These are sufficiently off their highs for the year as to trigger this thought -- "But wasn't the July jobs report good? Mr. Market said it was." Again, these are domestically oriented businesses with very robust long-term same-store sales and new unit growth rates three to five years forward. In a normal world, these stocks would be the ones to own, as economists are slashing gross domestic product estimates and pure play consumer cyclical and staples are sounding cautious on the balance of 2012. Alas, they're a no go.

Polo Ralph Lauren (RL): How in the world was this richly valued stock bought off the session lows Wednesday, given the glaring negatives in the earnings release and conference call? Nutzo. Why push the price-to-earnings multiple higher? This is came even as the company told us its fiscal year outlook is predicated on a reacceleration in retail segment sales into the teeth of the fiscal cliff. Weird.

Macy's (M): I nailed the Polo call, but broke a pen in half seeing the market's response to Macy's numbers -- I had been looking for a full-year-earnings guide-down. The market bought what management was selling -- optimism for the holidays -- hook, line and sinker.

Aaron's (AAN), Rent-A-Center (RCII): We're looking at pretty strong moves in these rent-to-own players. I see this and think people are still reaching to buy homes at cheaper post-crisis prices -- even though, in many markets, prices have shot up. That partially explains why a Scotts Miracle Gro (SMG) struggles with consistently inconsistent results. This also applies to stocks like Bed, Bath & Beyond (BBBY), which is experiencing a moderating trend in its same-store sales. In addition, what is the status of consumer balance sheets if people are opting to rent than own? This is not just a homeowner thing.

There's a host of weird happenings in other sectors, as well. I'm definitely decoding a handful in industrials and restaurants. I can't necessarily say that spending hours of research is a surefire path to short-term success, and that stinks. Doing so may only prevent disaster -- exiting a stock before an earnings release -- as opposed to establishing a position from which to win. The market is that maniacal. I almost forgot: I am negative on PetSmart (PETM) into earnings.

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