The Day Ahead: Are You Rocking the Juice Needle?

 | Sep 26, 2012 | 8:00 AM EDT  | Comments
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Stock quotes in this article:

ges

,

anf

,

aeo

,

aro

,

sph

,

spg

,

bwld

,

cat

,

cr

,

cbi

Check it. In the past month alone I have found five nasty, used steroid needles in the otherwise clean gym locker room. Instead of being grossed out by the syringe that was lying on the ground Tuesday evening, I figured why not flip it into a positive. So, I ask, are you still rocking the juice needle as it pertains to the investing decision-making process?

Juice Needle Ingredients

Not a day goes by that investing gibberish isn't hurled in my direction. Usually the complexity of the jargon increases during soft patches for the market. To me, the juice needle is filled with two old-school concoctions designed to keep investors in stocks while the smart money is holding committee meetings and lightening the load. Oh wait, partner, you mean to tell me the smart money is standing pat at this very moment? Let's get real. There is yawning talk of the Fed losing credibility (more on this below) plus a growing view the actions in place are unworthy of ignoring negative corporate news. 

Here is the clear juice in the needle:

"The trend is your friend." In other words, forget the two remaining earnings seasons for 2012 as the underpinnings of the summer rally (increased Fed liquidity + ECB promises = transmission to corporate income statements and balance sheets) are the true feelings of the market. These innermost feelings will supposedly power the S&P 500 north of 1,500 by year end. If you have been watching me like a hawk, there should be no surprise that I am short-term bearish until additional excess is vaporized from the market (valuations reset to incorporate mounting real world risks). At the very least, the action in the market has to first stabilize and then improve.

"Don't fight the Fed." When hearing this, it's meant that because the Fed is pump-priming, stocks are a persistent reflation trade. Investors earn zilch on savings, Treasury yields are lame and these factors will bring the crew to the burning fire known as the stock market. Sure, fighting the Fed has been a losing battle post-recession, but an investor has to remember that fighting the Fed has to occur given incoming information that runs counter to the exuberance in the market (such is the case currently). Once that information is digested and valuations loosen up, then you want to flip back to not fighting the Fed.

You want to buy dips? By all means got for it, just count me absent the party. I may look 15 years old in assorted photos swimming around the Internet, but am far from that in market years. Given the playbook I have developed, the signs point to further consolidation. Hold off, cowboy.

Eight Market Signs that Make Me Sad for the Longs

  • Fresh data that indicates modest improvement in the economy from August is sold (regional manufacturing surveys).
  • Fresh data that indicates the U.S. economy is significantly stronger than the doomsayers project is sold (September consumer confidence).
  • What began as chatter on homebuilders branches out to the point it leads to sector downgrades and positive news (Case-Shiller) is sold.
  • Consumer discretionary names with a sizable chunk of their business in Europe lag comparable U.S.-centric businesses and begin to trade down in higher volume. For instance, Guess (GES) and Abercrombie & Fitch (ANF) are acting horribly, where Aeropostale (ARO) and American Eagle (AEO) are holding their own. Message: EU debt contagion is not D.E.A.D.
  • Percentage changes in stocks on down days increase in magnitude and in breadth. Last week was seeing 1-2% moves in the red, this week 3-5% is the norm.
  • Highly-levered companies feeling it on the charts so to speak. Two names: Sally Beauty (SBH) and Simon Property (SPG). Message: risks of weak top lines and operating margins make earnings that much more of a risk (high=interest outlays).
  • An upgraded stock is unable to maintain gains after an initial pop. Good example is Buffalo Wild Wings (BWLD).
  • A major sector player in a Caterpillar (CAT) causes sympathy moves lower in Crane (CR) and Chicago Bridge & Iron (CBI). 

Defined: The Fed Losing its Credibility

It used to mean that actions from the Fed stood to ignore dollar-crushing inflation.  In turn, that would harm the reputation of the Fed as a steward of stable prices.   Now, the new school interpretation is that extra Fed accommodation won't be enough to ignite an economic reacceleration (or not one strong enough to support the rally) and that dents the perception of the institution's magic toolkit.

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