The Day Ahead: No Need to Be Piggish

 | Nov 29, 2012 | 8:00 AM EST  | Comments
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Stock quotes in this article:

dri

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hov

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jpm

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wfc

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shw

While taking refuge in a secluded park on Wednesday to re-energize and refocus, I watched two really fat pigs meander by. After freaking a little bit, I realized that there were no actual fat pigs. Apparently, they were figments of my healthy imagination, a true sign that the moments alone were a wise decision.

Then it dawned on me to respect the imaginary fat pigs, for they were sending a message on the more cautious tone I had struck on the market on Tuesday. In all honesty, the only reason I did not suggest locking in recent gains is that there was a feeling that the political circus on display at the White House on Wednesday would reawaken stocks, which had begun the week on a sour note. Hey, what fun is selling into weakness if it's not completely necessary yet?

Ah, but wait, there is a catch. There is no need to be a #FATPIG (use this on Twitter, thanks), which is what happens when you hang on to a winning hand too long amid mounting evidence that profit-taking would be the better course of action. After some intense soul-searching, I suggest cashing in the winnings that have begun to accumulate from the holiday-infused week. Here is why:

For now, the market is in this zone where it responds favorably to any encouraging news on the fiscal cliff. The market has not been forced to call politicians' bluff, since there is an entire month wide open to get a deal done. What I am growing concerned about is the inevitable point where the market votes that it lacks faith in the political process. That would leave stocks susceptible to two significant headline risks: commentary that fiscal cliff progress is being ignored (stocks go lower), and no progress is delivered (stocks also go lower).

I have been reading a ton of fun stats on the market's historical seasonality for December. Here is a simple one, compliments of Bespoke: Since 1928, in the month of December, he S&P 500 has averaged a gain of 1.46%, with an increase roughly a single point higher in years when the market is up year to date going into the month. My sixth sense is that the daily digestion of these types of stats is keeping investors hanging on to stocks, hoping and praying for a seasonality effect into a month that is anything but historically normal.

My longtime friend and veteran Washington policy analyst for KBW, Brian Gardner, has noted, "According to IRS data, there was a 50% increase in the number of tax returns claiming income between $200k-$500k from 2000-2009." This implies a direct, immediate hit to an integral part of the economy that, in my view, many in the market have absolutely failed to factor into their fancy models (bring up that discount rate, baby!) and the general public neglects to understand this until the day of reckoning arrives. Was this factored into stock valuations prior to the Turkey Day rally? I reckon no, but it should circle back into focus as the market picks apart commentary to a stronger degree in early December.

Odds and Ends

  • The Federal Reserve's beige book was initially embraced by the market, since it demonstrated that "growth improved despite fiscal cliff nervousness." Nervousness in November is vastly different from fear in December, and tepid growth could certainly turn to stalled growth before we enter the final stages of fiscal cliff details (and then who knows upon implementation of policy...).
  • I'm not a fan of how homebuilders (DR Horton (DRI), Hovnanian (HOV)), derivatives of the housing recovery (Sherwin-Williams (SHW)) and financials (JPMorgan (JPM), Wells Fargo (WFC)) are trading. It's almost as if these key names, levered to the fortunes of a sector that has returned to being a GDP contributor, are playing with our emotions, when in truth, they want to move down.

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