The Day Ahead: Snipe the Bull -- or the Bear

 | Nov 19, 2012 | 8:21 AM EST
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Boom! Wake up ladies and gents. It's show time. Do you have grand visions of mailing it in during this holiday-shortened trading week? Better put back on the camouflage gear and dust off the scope on the investing sniper rifle, for we are at a crucial juncture in the markets. Your mission is to take out either the bulls or the bears with a clean shot, and to do so after developing a thorough plan -- because, for the first time since the elections, two strong opposing views are in the roaming the forest.

I am not talking about the gibberish that had been spewed by book-pumpers throughout October and into the election. On the contrary, there is new, tangible evidence to suggest stocks have gotten too cheap, assuming we see a "compromise budget" from Congress (which is different from the austerity budget reflected by the recent decline in stocks). Still, while I feel the passion in the voice of the bulls as they wave around an array of fancy technical measurements, keep in mind that the bears remain ravenous -- and they have every reason to be skeptical of the claims by the bulls. There is this creepy sense that another 200-down day on the Dow is possible if the political-suit-wearers do not deliver incremental holiday cheer on fiscal cliff at each presser.

Market Sanity Check

After Friday's session, when stocks reversed earlier losses on a good deal of volume -- with Apple (AAPL) entering into the mix, no less -- there are apparently green shoots forming beneath the soil. The rationale is that the fiscal cliff will be mitigated and that the U.S. will narrowly avert recession in the first half of 2013 -- and that, in any case, this latter scenario is one the market has already discounted. A problem with this logic is that the corporate profitability picture remains a divergence, and the macroeconomic data have been of no help thanks to Hurricane Sandy.

So, in all, an investor is left buying on hope the market is correct in reading daily political headlines. You dig?

Newly Born Bears Say . . .

The raw meat for the bulls: Investor sentiment has approached levels that, in the spring of 2010 and the summer of 2012, signaled an end to corrections in those periods. Compliments go to MKM -- and the American Association of Individual Investors -- for the visual piece of fun below.

American Association of Individual Investors -- Bullish Sentiment

Here's what I continue to wrestle with: Is this the beginning of the correction or the end of the correction? I lean toward the position that more selling is in the cards: The S&P 500, at an average 12.1x forward price-to-earnings multiple -- well off 10-year average -- says stocks are pricing in either modest first-quarter gross domestic product growth, or a modest decline.

What's not priced in is more downside risk borne of an economy that feels as if it's virtually at a standstill -- because this could further delay capital-expenditure plans, impact spring retail sales and so on. While I prefer the comfy confines of Club Reality, Mr. Market has latched onto these optimistic assumptions:

● Top marginal tax rates go to 36% and 39.6%, not far removed from what we're seeing at present.

● Sequestration disaster story avoided

● Tax code revamped -- though removing certain deductions will make consumer spending rather interesting to observe come March

● 2013 is an adjustment year, not a recession year, and companies with lean expense bases could do OK against that backdrop.

● Stocks are trading above their 50-day moving average at the lowest level in a year (an oversold indicator).

Fat Bears Say . . .

● In addition to what I've outlined above, the Dow has slightly underperformed the S&P 500 since the September high, and transport names such as FedEx (FDX) and UPS (UPS) continue to act atrociously. Copper had a bounce last week, but I fancy that was more related to China. Bottom line: I want a greater number of positive signals to serve as confirmation.

Boy, do I want to snipe the bear and carry the flag back to the bull camp, Call of Duty style. Being a member of Club Realty is only fun until the tide turns, and then you look like a fool holding on to prior battle wins. Nonetheless, I want to see stocks heal a bit from the large chart gash seen from mid-September to mid-November, and I prefer to recommend chasing a tape up 2% instead of risking my reputation in order to fit in with others.

Such a tape-chase, by the way, would prove to me that oversold sentiment has turned, and become constructive, into unforeseen fundamental reasons. In other words, the future earnings streams of companies would then sidestep a huge bout of malaise.

All that said, before Black Friday I will add another stock -- Gap (GPS) -- to my holiday-season shopping list, along with the already-named Dick's Sporting Goods (DKS) and TJ Maxx (TJX). I think Gap's fourth quarter will be particularly strong on same-store sales and operating profit due to stronger assortments; better in-stock levels, particularly at Old Navy; tailwinds from cotton-cost deflation; and consistent marketing across verticals.

That aside, should the tape action require us to evolve, where we should head next is industrials, with a keen focus on early-cycle names.

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