The Day Ahead: Putting the Market on the Couch

 | Nov 26, 2012 | 8:00 AM EST
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The stock market has feelings, you know. They are not readily apparent to the majority of the population but, to some, diagnosing the market's inner feelings comes naturally. Day in and day out, emotional outbursts here are supposed to be the norm -- and, when they are not, it raises a red flag.

This is precisely where we enter the new week -- full of the hope and promise that politicians have drug-shot into the veins of the market. In this way, perhaps investors have been profitable through these couple of holiday days free of news conferences. No emotional outbursts were present last week; all we saw was a cool and calm march higher on thin volume that, interestingly, did pick up Friday. It's as if the market is concealing its real feelings and acting in way that assures interested observers that all is fine and dandy. This is a precarious situation, that's for darn sure.

On the outside:

● Stocks are in a confirmed uptrend.

● Stocks are regaining their 10-week moving averages.

● Companies are already starting to announce special dividends to compensate shareholders for looming higher taxes. They wouldn't want to lose any more of that shareholder base.

● The S&P 500 and NYSE have closed above their respective 200-day moving averages for four consecutive sessions.

● Hedge funds continue to maintain net long exposure to growth-sensitive areas of the market, such as consumer-discretionary, while shunning defensive sectors like consumer staples.

● 'Tis the season for investment-bank prediction pieces. Per the usual, almost all are optimistic or, in jargon-land, "cautiously optimistic." This forces investors to balance near-term fiscal-cliff risk, both real and headline, with apparent opportunity via multiple and earnings expansion.

● Apple (AAPL) and its heavy rear end have finally stopped dropping. With that comes a budding view that the Nasdaq could get atop its 200-day moving average.

But on the inside:

● I learned enough on Black Thursday, Black Friday and the weekend to say: "Wait a minute -- forget that seasonal hype and consumer confidence are at a high for the year. The holiday season has really only commenced on a so-so note." Large-ticket door-busters in electronics lay unsold in Sears (SHLD), Target (TGT), and Wal-Mart (WMT) into the weekend. That signals something is wrong. By the way, if you are wondering, American Eagle (AEO) was a winner, whereas Zumiez (ZUMZ) was a loser. Both of these names are due to announce earnings this week. I don't want to overwhelm you with holiday trades -- only offer the more impactful opportunities.

● The market acknowledges that its momentary bout of enthusiasm came amid a lack of fresh "fiscal cliff" developments. It also knows this dynamic is set to change, and possibly quickly.

● The flow of data could become incrementally more negative for stocks, thus reprising the opinion that fiscal-cliff effects have begun, and that they are far-reaching. For instance: Core durable-goods and consumer-confidence numbers are the building clouds on the near-term horizon, while consumer-spending data may fit too comfortably with initial reads on the holiday season to date.

Last week I got more constructive on the market. I admit this was a rather short-term call, borne of a valuation sanity check and a cold, hard review of data that were stronger than what I had expected. I am appreciative of the headline risk that's now back in the fold, but I feel it would be reasonable to stay exposed on the long side of the book until the markets slaps us in the face. Still, be prepared to move fast at the first sign that the thesis I have presented, or one you yourself hold dear, is being negatively uprooted on a fundamental level.

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