The Daily Dose: It's a Correction or a Rally!

 | Dec 16, 2013 | 1:00 PM EST  | Comments
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Stock quotes in this article:

hog

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fl

,

finl

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kbh

,

len

,

pll

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nke

I can say this with an absolute sense of clarity: the week will set off a correction or rally in the stock market. How is that for a dose of "best in class" forecasting?  Hey, I didn't triumphantly win a bunch of prestigious Starmine analyst awards for having a pretty face alone!

The market enters the week having digested two back-to-back losing five-day periods -- which seems to be the new norm ahead of Fed meetings. You know the playbook: the bulls conjure up fear on a single word on the taper and support it with enough modest selling to shake out the "Johnny Come Lately". The bulls stand ready to jump back in and buy their 2013 besties into yearend and place stronger wages on 2014 picks. But they also are prepared to dump and morph into short-term bears while their head of strategy predicts S&P 500 at 2,000.

Here are two common man scenarios from the Fed extravaganza:

  • From FOMC statement to the Ben Bernanke presser, the tone remains largely unchanged. Perhaps a bit more hawkish, but not to the extent to warrant wholesale portfolio maneuvers. Recent weakness in the market is deemed a buying opportunity in advance of one last full-on QE-induced rally, with the program finally being tapered in the spring of 2014.
  • From FOMC statement to Bernanke presser, there is a sense that Ben will pounce on the latest market weakness to sound more forcefully on the taper. That would let out additional exuberance from asset values so that his pal Janet Yellen could enter the seat with expectations established. This would be akin to Bernanke taking one for the team. In my view, if this is the route chosen by Captain Bernanke, it will resemble his May 22 taper-related comments that sent the markets into a tizzy, and yields on an upward trend.

If dangled over a cliff and forced to provide free strategy, I would lean on the side of caution into the Fed meeting. Here are three top takeaways:

  1. Stock prices do not reflect the perceived impact of the taper, such as an unexpected slowdown in U.S. growth in the second half of 2014 -- preceded by a slowdown in emerging markets in the first half of 2014. Industrials trade at 18x forward earnings currently, hardly a bargain for an investor living in the land of the taper beast.
  2. History has shown that QE rallies could be chased to the upside, so why expose your portfolio to being slaughtered on more hawkish Fed speak?
  3. The one-month performance of emerging market equities is a story being under-appreciated by the markets.

Around the Horn

  • Housing perfect storm: Orders are slowing at homebuilders and it's a development I am carefully watching for it could surprise the market should rates rise further into the key spring selling season. Housing starts/permits and existing home sales reports, as well as earnings from builders Lennar (LEN) and KB Home (KBH), are must reviews to see if yes, certain markets are pushing back to higher housing costs compared to the lows.
  • Nike: the bottom dropped out of Nike (NKE) shares on December 10, and the stock has now underperformed the Dow and S&P 500 in the past month. I think this is a result of Nike's emerging market exposure and pressure on emerging market stocks at the moment. Nike should beat earnings handily amid a continuous virtuous cycle of product innovation (Nike is owning the windows of Finish Line (FINL) and Foot Locker (FL) this holiday season), and be on track to follow the report up with a strong dividend increase.

Extremely Random Stat to Know

  • Harley Davidson (HOG) has an 80% market share in motorcycles compared to 5% for Polaris (PII), which makes Indian and Victory brands.

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