The Daily Dose: Make No Sudden Moves

 | Aug 12, 2013 | 9:00 AM EDT
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A Word on Apple

"You rarely look at it. But you'll always feel it. This is our signature. And that means everything."

"If you do everything, how can you perfect anything?"

These were the thought-provoking quotations presented by Apple (AAPL) in a recent advertisement in GQ. They really made me think about how the iPhone 5 feels in your hand. I'd describe it as almost luxurious, mixed with a sense of security. Along with this goes the dependability of Apple's hardware, which is contrary to some of the handsets being churned out by Samsung, Google (GOOG) and a company called BlackBerry (BBRY). Much can still be said, no doubt, about Apple's attention to detail.

So what's the problem? Well, Apple is asking consumers that live on demand nowadays -- a way of life created by Apple products -- to wait for what seems like ages to obtain near-perfection. I say "near" because competitors are sitting at the table with a host of functions that aren't yet available on the iPhone or via the App Store.

Macro Stuff to Chew On

Over the weekend, the predominant question I received from clients was this: Now that you have moved to neutral on the market, what's the next maneuver? (Hey, we're not the only ones in neutral. Credit Suisse is in the same camp.)

It's a darn good question, as the day-to-day market action does not suggest that investors have ramped up their exposure in order to play an epic post-summer downturn -- short interest ratios are down on the major indices. Nor does the market indicate that folks are implementing wholesale alterations to their portfolio, say by shifting completely to cash.

But these observations could carry both positive and negative implications. On the positive side, a treading-water market may go higher solely on the power of favorable August data. It would go something like this: "We aren't afraid of the Federal Reserve tapering stimulus -- long live strengthening economic shoots."

On the other side, investors may simply be blinded by their year-to-date success, as there have been many market heroes so far in 2013. As a result, these folks may be ill-prepared for the realties that will emerge in a couple weeks -- including a mountain of Treasury debt issuance, debt-ceiling drama Round 105 and reams of August macroeconomic data that could solidify a September tapering by the Fed.

These are a few new factors I am watching for clients. I expect these either to become constructive once more, or for these to prompt more incremental bearishness.

1. The 10-year U.S. Treasury bond yield hit a high of 2.75% on July 8 from a low of 1.61% on May 1, and has since retreated. If we see a continued methodical march upward in interest rates, as I anticipate, I'll be concerned about the headline risk to stocks. That's especially so after comments out of early-cycle companies -- for example, homebuilders -- during the latest round of earnings calls. Note that the home-construction sector was one of the worst performers in the entire market last week, and it weighed on broader market sentiment.

2. The market is sending an early indication that it's somewhat confident on the progression of the recoveries in China and Europe in the second half of the year, and that the U.S. economy is a new source of risk. All the stocks in the Dow Jones Transportation Index have traded poorly in the past five sessions, with specific dishonorable mentions going to logistics companies and railroads. In light of this, you'd do well to pay extra attention to the direction of the small-caps.

3. It bothers me that a company like IBM (IBM) is giving its hardware division a week furlough this summer at reduced pay -- it has global macro implications that, in my view, are not reflected in present valuations. It also concerns me that foot traffic was weak at Ralph Lauren's (RL) retail stores in the most recent quarter.

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