The Day Ahead: Blind-Date Jitters

 | Oct 03, 2012 | 8:40 AM EDT  | Comments
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Stock quotes in this article:

aapl

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yhoo

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pzza

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ge

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ayi

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low

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hd

With the advent of monthly-fee dating services, gone is a certain element of fear that had always been built into the blind-date equation. Will the person be as good-looking as they sounded on the rotary phone? Were they lying about their age? They sure sounded as if they enjoy sipping on Geritol -- while on the rotary phone. What will the exit plan be if things head horribly south in 15 minutes?

But, while much of the blind-date fear has fallen by the wayside -- thanks in large part to Facebook's (FB) Instagram -- there is still that sense of unknown. As I have gone through all sorts of research on stocks and the market of late, the fear has been jumping off the screen from itty-bitty second-quarter footnotes on 10-Q filings. It's been apparent in trend analyses of items as simple as sales and segment margins -- spare the extra second and step beyond praying at the altar to the "consolidated op. margin," as it's quite helpful in determining a more complete thesis on the company. Finally, I've heard it via recent analyst day circuits.

In fact, to really take it to a level of creepiness, the point came long ago at which certain words -- whether good or bad -- began to appear in 3-D images in bold, black ink. The pros will understand what I just said; others might say some simple laughter will put me at ease.

Then there are market happenings that must be watched. I have often stressed the importance of maintaining a running log of these, and I hope you've been following suit. Right at this very moment the true state of ugliness is trapped beneath the following: (1) initial strength in stocks at the session open; and (2) head-fakes at the close of trading that mask what went down in many sectors from 11 a.m. to 3 p.m. EDT.

Prep Course for Daily Blind Date with Stocks

● Realize that the market is not under pressure from Apple (AAPL) having near-term supply constraints. (Think: the stock has been sold, so where has that money gone? Maybe it's passed into defensive utilities?) It's not suffering from a Facebook CEO that is trying to extract top talent from Russia, Papa John's (PZZA) giving away free pizzas, nor even from Yahoo! (YHOO) grabbing headlines every time the new CEO speaks. See the absurdity in those comments? The market, as I see it, is comparable to a person trapped in a box slowly filling with water: It does not know where it can turn to escape to safety. That, coupled with the typical apprehension around earnings season -- which is only magnified now, as we have entered fiscal-cliff danger zone -- is the sentiment and realism that are driving stocks after a euphoric event.

● Ask yourself this if you're yearning to jump in. In the Institute for Supply Management manufacturing survey, is the consumer-confidence measure that may have transmitted into it a reflection of prior stock price appreciation? If so, is that measure at risk of reversing in October, November and December?

● What I characterize as "garbage stocks" -- shares of companies with weak fundamentals and trading at discounts to peers in terms of valuation -- are not attracting bottom-fishers. How do I arrive at this conclusion? The "garbage stocks" continue to fall further from their 50-day moving averages.

● What I characterize as "sexy stocks" are putting in weak defenses of their 50-day moving averages, looking at volume, or they look destined for a test. If these companies continue to deserve their valuation spread relative to "garbage stocks," based on superior fundamentals, shouldn't there should be greater interest on a pullback? The fact that there isn't suggests further cream must be sliced from the toppy valuation.

In order to survive a blind date, one has to be mentally ready for all scenarios. Remember that, while you may be subliminally bathing in the chirpings of uber-pumpers, let your facts be the guide -- and be prepared to change when the facts begin to evolve. Or, if you are super long-term, names such as General Electric (GE) look to have pricing power in a world ridden with risks.

Your Daily Learning Lesson

I received a great question Tuesday -- someone inquired whether the bad sales and earnings misses from Acuity Brands (AYI) were causes for worry on Home Depot (HD) and Lowe's (LOW). I love this individual's dot-connecting. Ultimately, I say no -- it may actually be a positive sign that a name such as Home Depot has continued managing its business to gross-margin expansion, as opposed to becoming too enamored on the housing recovery (If it orders a ton of inventory that doesn't sell, that raises the risk). In a duel with Lowe's, Home Depot remains my pick for multiple reasons.

Prez Debate Fun

Stick in your Google (GOOG) calendar to peek at my Twitter feed, say, at 7:30 p.m. EDT or so. I'll have a friendly debate-party game for you to play.

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