The Day Ahead: What's Really Killing the Market

 | Dec 04, 2012 | 8:30 AM EST
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On the upper-left-hand corner of my vision board, which is the dedicated space for long-term career goals, are the seven reminders below. All of them pertain to investing in some way or another.

  1. Be relevant.
  2. Be actionable.
  3. Show that you care about the topic.
  4. Always bring value to any setting.
  5. Do not follow the crowd; innovate where possible.
  6. Always remember the person on the other side of the camera; they really need your help.
  7. Be prepared to the power of 1,000.

With that in mind, I will cut right to the chase: I'm currently seeing a severe lack of thought innovation on investing and what drives global markets, as well as a complete loss of focus on basic investing principles. The things I see, and where I see them, are disturbing. I've witnessed intense table-pounding on irrelevant items; overhype on an issue that has the sticking power of three minutes; and an odd inability to stitch together, at the minimum, 10 different theses to help investors succeed in all time frames.

In my view, this lack of thought innovation, and the short-term mindset we're seeing, are quietly killing the market at a very critical juncture. Improper planning will lead to surprises regarding data that shouldn't be of any surprise if one has preemptively made the correct linkages -- and usually due to thought development that's conducted outside the box. Where there are surprises there is a "sell first, ask questions later" mentality. That only ropes in those individuals who are spending their precious free hours to investigate macroeconomic matters and specific attributes of would-be investments.

Why am I bringing this to your attention somewhat angrily? Well, if you scan the market across sectors, a great many stocks are either resting on their 10-day moving averages or have finally slipped beneath them. Given that stocks are at these levels, I don't sense investor appetite to bid these higher. It appears this was for fear of the volatile state of Mr. Market following headline wars on the fiscal cliff -- and, as Monday showed, of the potential for a stretch of negative data surprises.

It remains my opinion that investors continue to be frighteningly unprepared for December, sitting on such ridiculous advice as "go overweight cyclicals" and "buy industrials." While cyclicals have constituted one of the strongest areas of the market in 2012, component companies will face tougher financials comparisons, as well as consumers dealing with tax increases. As for industrials: So a modest acceleration in China's economic growth is enough to offset the potholes in U.S. and Europe? Did you see that 100-basis-point drop in the export figure from the Institute for Supply Management, tough guy?

While I have the podium, I may as well fine-tune my recent bearish call on the market. You may even want to question getting long defensive sectors, assuming we're heading for an unacceptable fiscal-cliff outcome -- or none at all by year-end. Such a result may create tight correlation among stocks in various sectors. Obviously a great deal of my reservations on "risk assets" will be wiped clean if a deal is reached, and then attention can be shifted to selecting winners from at least six months of suppressed global economic growth. (I reiterate my view that the U.S. is likely to narrowly avert recession.)

Things That Are Keeping Me Up at Night

โ— I'm bothered by macroeconomic strategists' obsessive attention on corporate earnings remaining "positive" -- as in, we are not in the colony of losses. In my investing classes, however, I could have sworn one integral qualifier to buying a stock was that earnings growth should be accelerating. When I read this stuff, it takes me into an internal dialogue that bullishness reigns too supreme, and that valuations are at risk, given the likely short-term direction of news flow.

โ— The market clearly hated the November ISM report, but I don't think it really embraced the deceleration in the headline number. My sense was that the market believed December would be a bounce-back month, instead of the second consecutive month of disappointment. What this means is that November started a new trend, and that it marked the beginning of fiscal-cliff impact prior to its real effects.

โ— The iShares Dow Jones Transportation Average (IYT) continues to install a series of lower highs, and the Dow Jones Transportation Average was a laggard Monday. Perhaps these moves better capture the true message of the ISM report -- which is to be prepared for data surprises in December.

โ— It's strange how Joy Global (JOY) has halted its uptrend in the face of encouraging China data. I guess the rest of the world does matter.

Short Candidate List

โ— Target (TGT): As Wal-Mart (WMT) has started to come on lately, Target has been losing ground. This action could be signaling that the market is pricing in a fiscal-cliff trade-down thesis.

โ— General Electric (GE): I don't particularly care for how the stock has acted on a relative basis in the past two weeks or so, and I believe everyone is jumping on the overweight industrial sector a touch early.

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