The Daily Dose: Spotting the Shadows

 | Aug 21, 2013 | 9:00 AM EDT  | Comments
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Stock quotes in this article:

jcp

,

hd

,

tjx

It's truly amazing how storylines appear to change direction when we get a single session in the green after amassing a series of days in the gutter. An aura of positivity seems to rain down on the heads of investors (oops, I mean traders) who are dying, yes dying, to pick a form of bottom and enter the Stock-Picker's Hall of Fame Class of 2013.

How do I know this is what is going down? I feel it in the emails I receive. Clients want to be told that a stock we rate a Buy is a worthy purchase, now that it's 1.5% cheaper than it was a week ago (notice that 1.5% is a better performance than that of the market amid this retracement, and none of my recommendations ever underperform...).

Unfortunately, there is a ton more behind choosing the appropriate time to buy a stock, especially in a market that is not providing all-systems-go signs. Tapping into my own highly disciplined state, here are the broad strokes I shared with clients on Monday:

  1. Technical damage has been done, so wait for convincing follow-through (which may not arrive anytime soon because of the approaching holiday).
  2. Leading sectors in the market continue to suggest that caution, or no new buys, is the correct strategy.
  3. Bond yields and stock prices are at their tightest correlation in some five years.
  4. There is not enough risk priced into the market, bottom line. Some risks I believe the market is overlooking: 1.) A continued discovery for the point where bond yields are perceived as attractive against the expectation of $10 billion to $20 billion in Fed tapering. 2.) Earnings estimates on the S&P 500 are too A-Rod-like juiced for the fourth quarter of 2013. 3.) August non-farm payrolls, in light of claims trends, will only inflame fears of Fed tapering; the market has shown me nothing in terms of waiting with open arms for positive macro data.

This tidy list points to what I call the dark shadows in the market. Spot them while everyone else is being giggly for a day, and avoid the pain.

What I'm Hearing

  • Talked to legions upon legions of people about J.C. Penney (JCP) yesterday. Honestly, buy this name if you don't want to sleep comfortably into the holidays. First, despite the hype job done by the really boring CEO, J.C. Penney will need additional capital in 2014 unless the economy grows 5% in the holiday quarter. I believe this capital will come in the form of a new share issuance. Second, J.C. Penney is sitting on home inventory that will require major discounts to magically turn into baldy sought cash, and that is a dreadful position to be in. Third, Kyle Bass' debt play puts him senior in the capital structure (if I read the news correctly), or first in line to get paid if J.C. Penney goes bust.
  • TJX's (TJX) sales continue to slow, even as low-income families are returning to work and people are trading down. Just sayin'.
  • Expect post-earnings downgrades on Home Depot (HD) shares. I saw a few less-obvious holes in the earnings call (likely other analysts found them too).

Special Note

I am going to be on the CNBC "Fast Money Halftime" desk today for the full hour. This is a real honor for me, and I am pumped to "bring it" and share actionable information. Thank you all for the support and kind emails through the years, I promise not to disappoint.

Since I will be fired up and filled with at least two Red Bulls (part of my pregame routine), shoot overloads of questions to me on Twitter @BrianSozzi during the show. Be sure to copy in @CNBCFastMoney and hashtag #TST.

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