The Day Ahead: Stay as Sharp as a Chainsaw

 | Nov 06, 2012 | 8:30 AM EST  | Comments
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Special Programming Note

I can see the writing on the wall this Election Day. Investors take a break from watching green and red colors blink on a trading screen to venture off to the voting booths. Then they return and sit patiently in front of the television screen, attempting to gain clues on who may have won the race, and in the process they lose focus on Mr. Market's real-time messages. Complacency enters the mix.

Don't be this gawker, please, and I am offering my services to prevent such a grave mistake. I have put complete life on hold -- refraining from grabbing food, talking with family and so on -- to assist in bringing you up-to-the-minute investing messages regarding the election. Please Twitter bomb me with questions, sharp insights and fun, provocative hashtags.

Four years ago I sat in a dungeon reading emails from clients on how they felt powerless as the election unfolded. But the reality then, as it is now, couldn't be further from the truth. Seize on your passion for investing and the need to be positioned correctly out of the election gate.

Moving Right Along

There is absolutely nothing anyone could add to the election debate, and constructing any new probabilities would be a waste of time. Sure, I could fill you head with fluff -- for instance, California's Proposition 30 would up the state's sales tax, and that would be no good for Costco (COST), which has a high store count there. I could also rehash discussion on the fiscal cliff. But why bother? After all, regardless of what happens, you will be tested severely as soon as the winner is declared -- which, based on my sources, will be around 11 p.m. EST on the major networks.

That sad, I have opted to disseminate a few broader themes and ideas for you to consider as watch your trading screens carefully and draw your own conclusions.

Transports and Jobs Stocks, OMG. I'm haven't been particularly keen on the action in the Dow Jones Transportation Average since the October jobs report. Maybe there Hurricane Sandy-triggered impact on the supply chain is baked into the cake, since interruptions mean margin risk. Or perhaps the real worry is that, no matter which candidate wins, the economy continues to drive in second gear. In fact, if Governor Romney grabs the prize, this may well be an indication that the economy is in the type of dire straits not delineated in the various data points we've seen.

I also would like to draw your attention to payroll processer ADP (ADP), shares of which mysteriously plunged through their 10-day moving average Monday. This occurred in spite of the October jobs upside and favorable revisions, and if the pressure continues, it will serve as a glowing red neon sign that the impending fiscal cliff stands to bring swift, negative employment actions by companies, adding to the growing list of "new restructurings."

You Buy Garbage, You Earn Garbage. My sixth stock sense unearths this: The typical Election Day enthusiasm will somehow find its way to "garbage stocks" intra-session. Obviously Election Day has its magic and, with that, a national belief that things could get better in the future. (Otherwise, why vote? The person you're picking has to be backed by your own personal hope for brighter days.) But don't be lured into the happiness and buy garbage stocks that will only trade up based on expectations for magically improved operating performance after the election.

Here are some simple rules. First, while the third-quarter earnings season has been bad, winners do exist -- and they tend to really stand out. Find stocks that have detached from the company's underlying positive fundamentals and could score a sell-side upgrade heading into year-end; see the upgrade on shoe retailer Genesco (GCO), for instance. Of late, I have noticed that upgrades currently have more juice on perceived oversold situations than they had had prior to earnings season. This is a little something that demonstrates 2013 revisions to models have bottomed, and that there is potential for beating that lowered expectations bar.

Ask Yourself These Questions. Will the fourth quarter be stronger in terms of sales and earnings due to election finality? How will initial 2013 guidance be set? Are there any clues on either of these at the present time? Interestingly, Alcoa (AA) has traded sideways to slightly lower since its Oct. 9 earnings report, with a gap down the following day. Moreover, Fastenal (FAST), which announced Oct. 11, has basically given back its earnings-related pop. In other words, the market is in a true holding pattern, so watch these industrials very closely for clues on how the fourth quarter stands to ultimately unfold after the election.

Frown on the Debt Issuers. Companies have engaged in a mad dash to issue debt at low yields into the election. Hey, I understand the rationale: Lock in easily serviced capital and focus on execution going into 2013. But this was a hasty decision to mess with the capital structure in a slow-growth environment, in my view. If you're waiting to act on a group of companies in a similar sector, I would assign two tiny thumbs-down avatar to the debt issuers -- one for iffy management and the other for new debt alongside slow global growth.

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