The Market Doesn't Know What it Wants

 | Dec 03, 2013 | 12:09 PM EST  | Comments
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It's never a good time when you can't figure out what the market wants. Is it appeased by strong growth? Does it want tepid growth? Will the market lose its best prop, the Federal Reserve, if things get better, especially when there's no firm evidence of things getting better?

That's the conundrum in which we find ourselves. I think it is a principal reason why the market is feeling toppy.

Let me lay out both sides.

On the one hand, we have excellent auto sales -- the strongest in years. Terrific, right? But, on the other hand, we have a Fed that's just itching to step out of the way, and it sees the auto sales and the strong manufacturing number from Monday, and it might be inclined to let interest rates go higher. That, in turn, would take away a major pillar of support for the market.

We have the possibility of a strong employment number this Friday, which we would like to consider to be good news. But for whom is it good news? We don't have any earnings announcements to speak of, so anything that's "good" might not translate into higher earnings estimates.

But it could immediately translate into something negative for bonds and another round of questioning when the Fed might taper quantitative easing -- which never fails to drive stocks lower.

We know there are many parts of the market that actually do better with higher rates, a big camp actually doesn't mind an increase. The financial stocks desperately need slightly higher rates so they can make easy money off of your deposits and CDs. But if rates shoot up too high, too fast, we'll lose the home buyers. Then all of the housing and related stocks will get hammered and they, too, are a key barometer and leadership group.

We know retail sales are punk. While this is bad for Target (TGT) and Wal-Mart (WMT), it does keep the Fed from letting rates fly up. But what if the Fed says, "Hey, these data aren't so bad when you lump in the cyberspace numbers"? Then the Fed would have to walk away from bond-buying, and yet you would still get lower share prices for the retailers.

A ton of stocks have been going higher simply because they are pure growth equities, meaning they do terrifically when there's very tepid growth. Here I am talking about the names such as Disney (DIS) and Starbucks (SBUX) and the Michael Kors (KORS). But what happens if we get a cyclical surge, a genuine recovery? Who needs the stocks of companies that are consistently strong when we can own the stocks of companies that are going to report huge year-over-year comparisons? That's what most managers really want -- the big comparisons.

So, even there, the market's in flux.

Now, we know there are mitigating factors everywhere. Activists are spurring activity. Today an activist shareholder at Abercrombie & Fitch (AEO) demanded the replacement of Wall of Shamer Michael Jeffries as CEO -- and the stock is rallying mightily. We have companies like Dow Chemical (DOW) and Ingersoll-Rand (IR) shedding divisions that have kept down their enterprises. We have rumors of some sort of recapitalization at Herbalife (HLF) once the company gets audited financials, which should happen imminently. We've got Apple (AAPL) and Tesla (TSLA) rallying on positive research.

Furthermore, as we know, lurking underneath are the funds that need to generate performance that can only be racked up if they do some buying. But where? When? Why not let it come in?

Right now the crosscurrents are pulling down the bulls. Confusion and uncertainty are always negative. Without resolution I think the marginal buyer -- the fund that needs to generate performance before year-end in order to catch up to the averages -- would prefer to see how low the market can go. Until the market gets to a level that tempts these buyers, and until we find out what's really "good" for the market -- meaning what most bulls really want, which is stronger or tepid growth -- I think you can expect more of the same.

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