The Day Ahead: Don't Ignore the Obvious

 | Dec 28, 2012 | 8:00 AM EST
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You want to create the trend that other people eventually follow. – Advice given to Brian Sozzi, circa 2005

By chance, did you hear that thunderous roar from the rooftop of the New York Stock Exchange yesterday? That was me. After spending weeks concocting forward-looking outlooks based on analytical rigor, I finally heard opinions in the marketplace coming around to reflect the obvious. For example:

  • All cash calls are intensifying. (People must be re-reading lessons from the debt-ceiling travesty.)
  • Calls to build protective positions are percolating despite the appearance of uber-bullishness. (Wall Street wants it both ways, by maintaining long equity exposure and also profiting immensely on the downside through options strategies.)
  • A growing number of people appreciate that a plunge off the fiscal cliff will bring economic pain, including the likely credit rating downgrade I laid on the table a week ago.

Let me clear about this: If you ingest new portfolio risk into some ridiculous Sunday House theater session that is sure to disappoint, you do so at your own peril. I prefer to chase the rally in case news about the fiscal cliff brings some short-term clarification.

In the meanwhile, study the items listed below like a hawk; they are fresh  causes for concern. If you want to entertain a more bullish posture, these occurrences (and others I've highlighted recently) should unwind either with a less-than-dreadful response from the market or with actual buying into the headline doom.

The Sad-Face List

  • Stocks that log a material down day are not snapping back in the following session. I interpret this to mean that these stocks have not been sold unduly; they technically deserve a bloodletting given changing earnings outlooks. (The market seems to be the only entity recognizing the changing outlook at the moment. People are still looking for 3% S&P 500 earnings growth in the fourth quarter of 2012.)
  • Have you been lulled into believing that in 2013, that the economy will create 160,000 new jobs per month, no matter the lingering fear of the fiscal cliff? If so, the price action in Paychex (PAYX) suggests that you better wake up, and quickly.
  • Approximately 61% of NYSE stocks are trading above their 200-day moving average. It sounds simplistic, but the outlook for 2013 is vastly different than in 2012. This percentage has to narrow.
  • Financial stocks have generally held at key technical levels on the charts. That's a good sign, right? Wrong. If the market goes south, as I imagine it could, a sell-off in financials will only feed the negativity. What stands to feed a sell-off in financials? How about: housing news that fails to support the recovery thesis. The unfortunate revision to October new-home sales fits snugly with two poor consumer confidence reports, no?
  • Stocks are reacting harshly to new information instead of being viewed as an oversold buying opportunity. Two sector call-outs: retail and homebuilders.

The maximum level of pessimism has not yet shown its ugly face. Maybe it won't, if the D.C. superheroes iron something out in the next seven days. For the time being, watch the lunacy from afar as investors begin to show more respect for reality by dumping their stocks -- knowing that you safely liquidated weeks earlier (provided you read this column). I will be in touch shortly.

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