The Day Ahead: And, Suddenly, the Sky Is Falling

 | Sep 18, 2012 | 8:15 AM EDT  | Comments
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Wow, if I didn't know any better I'd think the stock market was headed for an epic crash. Is the sky suddenly about to fall? These are just few of the thoughts that I gathered from sniffing around the market Monday. I am no whacked-out bull, but the tone of some pros was certainly interesting. It was almost as if they'd banded together in a closed-door weekend meeting and agreed to scare the weak hands, and then nibble at what those hands have dropped. Buy when everyone else is fearful and sell when there is a buying orgy, right? (This, of course, was in evidence after the Fed's announcement of a third round of quantitative easing.)

Welcome to the new reality. In an environment in which we are relying on an old friend for assistance -- the Federal Reserve -- there will be numerous attempts to shift investor attention to the next catalyst, whether good or bad. For the moment, there is an absence of a news-driven catalyst. All we're seeing are quiet monthly bond buys from the Fed and the renewed concern on the impact of fiscal cliff and corporate earnings.

Certain people had demanded investors load up into the Fed announcement, arguing that the action would light a new match to the rally. On days when these folks suddenly say, "sell, sell, sell," and we see a modest rotation into defensive names -- such as General Mills (GIS) and Kellogg (K) -- there will be a problem. Namely, none of these elements will be strong enough to completely raise red flags on the market's rally from the lows. As a result, an investor is left wondering if dips should be bought so as to sidestep a possible ride on a slippery slope into the election.

Here is my "World is Ending, Sky is Falling, Head for the Hills" checklist of things to be watching. I am not ready to hop off the long call I offered before the Fed announcement, as I've definitely seen that movie before. Instead of joining a chorus that's now crying wolf on corporate earnings, manufacturing reports and surprise risk factors from China -- and all solely because there is nothing else to pound the table -- I'd much rather build a concrete case for a course-reversal. I have no trust whatsoever in these suddenly-bearish folks. I only trust in the messages the market communicates on a daily basis. Here are some of these messages

1. Stocks that broke out going into the Fed announcement, such as retailers, are giving back the gap higher. Volume is key.

2. The market is responding more negatively to "disturbing" reads on the macroeconomic front. I think the Empire State index was "disturbing" for these reasons: (1) it was worse off a disappointing prior-month figure; (2) new orders remain soft; (3) employment was weak, thus fanning the flame of the idea that the Fed is unable to help; and (4) inflation expectations were up relative to slowing growth and amid the new Fed action. Although this report stank, the market did not get itself into a selling tizzy, which would be seen in across-the-board selling.

3. A bellwether company in FedEx (FDX) has downplayed the impact of QE3, has lowered growth estimates and has cast a dark cloud over non-transport stocks -- for example, Amazon (AMZN).

Should any combination of things from this real-life investing survival guide come to fruition, it may represent an appropriate point to reassess profitable positions and your overall strategy.

The Dimly Lit Rumor Bar

Here are some quick thoughts from my daily experiences.

● I'm never too keen on buying into takeover rumors. However, I'm intrigued by Providence Equity's reported interest in Electronic Arts (EA), given that this firm was a player in Hulu. There is a certain familiarity here with the digital business model, which is where Electronic Arts is positioning itself to succeed in the future. A valuation range of $18 to $21 seems justifiable.

● The more I dig in to Zynga (ZNGA), the more I appreciate the market's lack of confidence in its business model over the next 12 months. Not only are the barriers to entry small, but the company on its own is proving unable to monetize its mobile ambitions in order to offset potential issues stemming from the Electronic Arts copyright-infringement suit.

● Just to reiterate: I'm still not a fan of Decker's Outdoor (DECK) after my negative call last week. Price increases have been too robust for the consumer to swallow on products that are borderline-commodity at this stage in the game.

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