The Daily Dose: Hacking at the Brush

 | Aug 19, 2013 | 9:00 AM EDT
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Let's cut right to the chase. You need to be aware of the thick, prickly brush that the market must find its way out of before resuming its bullish bent. Since most people are blowing smoke, here is the daily dose of truth.

Three Near-Term Markets Risks

The first is the Jackson Hole gathering, where Janet Yellen will be moderating a panel and likely providing a snapshot into her deeper views on Fed Policy to the general public and Wall Street. We know she is a policy dove, but does this grand stage and impending decision by the president lead her to discuss monetary policy more broadly?

A specific worry is how she views the economy right now, which in turn would give us clues on the dreaded timing and magnitude of the initial taper.

The second item on the docket is the next round of retail earnings warnings.  They are coming, and possibly alongside comments from Yellen that could push the 10-year yield higher. When a Nordstrom (JWN) is unable to improve its comp from the prior year, and Sam's Club is telling us that members are trading down from steak to chicken and pork, some wacky stuff is going on out there on Main Street.

The third risk is the market being in a freakish grey zone, one where good news is showered with hatorade (taper, taper, taper!), and bad news is looked upon as the economy producing worse than the +1.7% GDP print in the second quarter of 2013.

I continue to use homebuilders as a guide on when the market could reverse course. Remember that homebuilders largely noted "little" change in demand trends on their 2Q13 earnings calls. I have heard the same with talking to the companies post earnings. This is different than the runaway, robust performance from 2012. The way the market is trading (forget this trader-desk, ghost-town logic, that the market is open daily to share new messages on the future with those who want to listen) it suggests that the third quarter of 2013 will be worse for those companies that led the market's rally, such as homebuilders and autos. In the third quarter, a negative trend will have formed, opposite to the "speed bump" thesis that was used on second quarter 2013 earnings calls)

Six Worthwhile Things to Know

  1. Stock prices are presently adjusting on the amount of expected tapering -- imagine when the experiment is concluded by mid-2014. After pricing in the initial taper the market will likely stabilize, and then seek to price in the missing juice that has served to inflate price-to-earnings multiples, and quite possibly, continued sluggish growth minus rock bottom rates.
  2. From 1971-2012, on average, stocks have fallen -0.52% in September, according to the Stock Trader's Almanac. Missing in the calculation: the impact of unwinding a quantitative easing program, making September 2013 a potential data outlier.
  3. The market is only dealing with investors booking profits; be on the spy for investors exiting entire positions as a means to solidify gains into September. What to watch as a signal of this occurring: volume on the downside intensifies on top-performing individual stocks within sectors.
  4. Caterpillar (CAT) shares were the sole Dow component to rise last week. When a dog such as this outperforms in a market pullback, one really has to think long and hard on the direction of equities in the near-term.
  5. Nobody should care that rates are at historic lows; that comparison is useless. People seeking to put capital to work want to know the future internal rate of return on an investment based upon rates that could be locked in today. Given economic growth in the U.S. has been below trend for a recovery period, and with creeping rates, those with capital may opt to continue to put off the investment that spurs animal spirits.
  6. Copper is at a 10-week high, thanks to optimism on China, as clearly the U.S. housing market has downshifted from the first quarter of 2013 and could downshift again going into yearend. That makes the quarter from Toll Brothers (TOL) later this week a must read.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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