The Day Ahead: A War Zone Out There

 | Nov 28, 2012 | 8:43 AM EST
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I hate to be the bearer of bad news, but the market is exhibiting three major characteristics of a war zone: destroyed structures; figurative "bullets" flying in every which direction; and creepy spells of quiet that are both good and bad, serving as times to reload and re-strategize.

Altogether, these mean rampant confusion will be the order of the day for next few weeks. Grabbing a good piece of economic data will only temporarily mitigate fear of potential late-afternoon Debbie Downer comments from President Obama or a prominent member of the House or Senate. Everything you learned from those books you bought at the now-defunct Borders could be burned, for an entirely new investing playbook is being penned. Along with it comes the creation of a solider-like investor class -- that is, hardened market players who march to the beat of ever-changing orders based on ground conditions.

This fella of the young finance movement is fed up with the daily mood swings of Mr. Market, and has been blunt with clients. One suggestion either to buy the dips -- which is essentially the same as saying valuations are cheaper than they were in the previous session. The second has been to liquidate and go to cash. After all, why should one buy a Treasury note ahead of a credit-rating downgrade?

As far as that second option is concerned, I've been suggesting clients return to the market as soon as the indices are able to circumvent distribution days after a few periods of encouraging buying activity. This was on display last week -- stocks reacted to fundamentals when they were given the opportunity to detach themselves from the political IV bag.

Thus far, I have been content with whistling past the graveyard, defending a more bullish stance that I began I began executing upon almost a week ago. A couple of reasonable arguments continue to underscore the defense here.

● Mr. Market has told me he will unlock the door to higher valuations -- and then earnings estimates -- once the perpetual threat of the fiscal cliff is removed. Even in a world that has to undergo "fiscal cliff" effects, Mr. Market is willing to bid up issues on the attainment of clarity, and from there it has grand plans of whiting down to the true batch of winners as cliff talk is put into law.

● Economic data, oddly enough, continue to skirt any impression of the fiscal cliff's giant paws. Companies dependent on outside capital investment may be in incrementally worse shape vs. the second quarter of 2012 -- but, by and large, "death by fiscal cliff" has not yet arrived on the scene.

Still, I am a realist, so I do acknowledge that little negatives seem to be snowballing. If I see another session in which the following are confirmed, it's back to being a bear roaming the woods.

● After "bouncing" from oversold levels, stocks are having difficulty clearing resistance points. #UberStall

● The consensus view holds that domestic data are on an improving trend, but analysts don't appreciate that it could collectively represent a pre-fiscal-cliff peak. For instance, could the Conference Board's confidence measure really touch a new high again in December? For real? Know that a peak here would translate into the potential for a shock to the market.

● I feel as though Mr. Market and yours truly are the only ones crying wolf on retail stocks. This sector has led in 2012, so to see it trade horribly with "strong" reported sales numbers is a red flag. I hold two reservations dear. First, from mid-December onward there could be a holiday sale cliff, with deal-seeking consumers having pulled forward sales ahead of the fiscal cliff. Second, earnings upside can't be driven higher if consumers are not spending more per transaction (as highlighted by figures from IBM and, to a lesser extent, Shoppertrak).

Here are some names I am using as tracking dogs for retail: Aeropostale (ARO), Kohl's (KSS), Macy's (M), Nordstrom (JWN), American Express (AXP), Visa (V), Discover Financial (DFS)

● Financial stocks are acting as if they want to slip through a trap door -- or key support levels, for you technical analysis fans, including 10-day moving averages.

SPDR Gold Trust (GLD) and the iShares Silver Trust (SLV) aren't doing much. I'd like that to be the opposite -- in other words, a whiff of inflation would be welcome.

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