The Day Ahead: The Market Deserved This

 | Dec 13, 2012 | 8:00 AM EST
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As we prepare for Thursday's session, you probably feel used and mentally tortured. Prior to the Fed's latest meet-and-greet, you had undoubtedly been injected by the same cocktail of drugs infused into Mr. Market: a powerful potion of hope and expectation that cause you to lose sight of what is happening around you.

I want to share something I wrote 22 minutes after the release of the Fed statement:

"Yes, the market has embraced the Fed's pledge to go 'all in' with respect to policy wizardry -- though kudos to Richmond Fed President Jeffrey Lacker for not wanting to have his name stamped on this stuff. But I suggest you watch for a potential weakening in equities ahead of, and then after, the Bernanke conference. Here's why:

"1. The central bank has basically tried its very best to institute a backstop to downside economic risk borne from the 'fiscal cliff.' In turn, that may cause both sides of the congressional aisle to play to their respective bases once more -- and, in effect, ruin the feel-good vibes underlying this week's rally.

"2. The Fed downwardly revised its October view of consumer spending, and also told the markets its actions are unlikely to spur inflation until sometime beyond 2015. Also, in the first sentence of the statement, it appears the Fed has disregarded the psychological and monetary toll of Hurricane Sandy. The read: Weak wage growth has become embedded, and there is risk to small progress this year in a land of higher taxes. Note that consumer discretionary stocks have been waning on solid volume this week."

This is a call rooted in level-headed reasoning devoid of any market-related noise. It's important to understand where I was coming from, so as to learn for future Fed meetings.

Lesson One: This is a bid-up market, largely with no sign of fundamental backing. We also have a Fed statement that says we're seeing a low-growth, subpar economic recovery in spite of hardcore easing. There was a disconnect here, and it deserved to be corrected by Bernanke's press-conference comments.

Lesson Two: If one were inclined to trade the event or reposition for month's end, one had to establish a general set of hypotheticals on Bernanke's musings in the hour between the Fed announcement and the conference.

For one, ahead of the speech, we should have guessed that Bernanke was likely to downplay the effectiveness of monetary policy amid a disappointing "fiscal cliff" result. He was also likely to stress that extra accommodation is no "panacea," and to throw cold water on the estimated impact of balance-sheet expansion. Also, Bernanke was likely to acknowledge the real structural issues suggested by open-ended bond-buying to the tune of $45 billion per month, and that stocks will have downside risk in a post-cliff world -- and the market should give a hoot about that.

In the end, Bernanke -- much like "Dirty Harry" Reid, Senate Majority Leader, before him -- sent stocks into the negative column. I fancy the move was justified. With the final Fedapolooza beyond us, the market will return its attention to Washington's backroom dealings and outward bickering. This is where things may get tricky -- a view I have been espousing in recent sessions. Do we place any stock in early-inning fourth-quarter corporate earnings and 2013 outlooks -- which, by the way, indicate slowing growth? Perhaps it is more appropriate to render those "tells" as old news and instead focus on items such as this:

  • A more cautious Fed, with projections shaved on gross domestic product growth
  • Plunges in consumer and business confidence
  • Wal-Mart (WMT) and Dollar General (DG) citing an increased promotional backdrop, thus highlighting increased risk to holiday spending -- and supporting confidence measures
  • Increasingly poor trading action in consumer discretionary stocks, and a subsequent uptick in negative sell-side notes on top names in the sector (shout out Under Armour (UA)).

Sure, we all want to throw on the capes and be heroes, devising an array of money-making strategies. Why sit on cash? Why not buy on weakness? Listen, stick to the facts smashing us in the face and connect the dots. The market remains very short-term focused, it lacks the willpower to rally convincingly on a series of days and not every sector is working. I repeat: thumbs down.

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