Allow me to share something I sent to clients on Jan. 24:
"I see two things going on right now in the market, here is the setup. Investors are realizing that fourth quarter corporate earnings are not as strong as the macro data suggested, neither are the outlooks. All of this is happening before the Jan. 29 Fed decision where theoretically, you will have a Fed reiterating its slightly more hawkish commentary. Only adequate corporate earnings plus baby hawks being born at the Fed, equals a pullback into that event.
"Bottom line: if you haven't been doing so already (those that have reached out to us personally began weeks ago), you should be reducing your exposure to the market. The guides we are using to recommend reentering the market are the Chinese and emerging market ETFs. Look at how they have been crumbling. There are many, many chart breakdowns out there across different sectors (alarming...), but it's imperative to see the indices leading us lower stabilize first."
Now what? Stocks were kicked in the face and bloodied pre- and post-Fed decision. Should you buy the glaring gash in the Dow chart? Raise more cash, as I advised clients to do? Here's my advice: Do the latter and forget the former is an option for the time being. Remember these three things we've learned from our kind folks at the Federal Reserve.
- Simple, But True: Stocks are reacting badly to: (1) forward Fed communication; and (2) the actual tapering of bond-buying. The market must prove itself in early February that it could deal with both a fundamental policy shift and a change in tone from the governing body.
- QE Bye-Bye: Quantitative easing is on pace to be finished by the end of 2014, and a moderate economic expansion is to result. That makes for a brutal outlook for the start of 2015 -- or, at least, this is what was getting discounted in stock prices Wednesday.
- The Fed May Be Blind: I am specifically concerned about the Fed's shout-out to increased household consumption as retailers issue massive earnings warnings and prep to unleash a tsunami of domestic store closures.
Around the Horn
• It's disgusting that the BJ'S Restaurants (BJRI) Barclays downgrade was leaked on Tuesday. You won't hear that confirmed anywhere, but check out the stock price action ahead of the downgrade. Ditto on the Credit Suisse Outperform call on Wal-Mart (WMT), released Wednesday morning.
• I encourage you to ask your broker for Belus Capital Advisers' note on Best Buy (BBY) issued Wednesday. It seems to be what sent the stock lower.
• Starbucks (SBUX) management changes have positioned three people to succeed Howard Schultz within three to five years. I have a scheduled call with Starbucks this Friday.
• HanesBrands (HBI) had the quarter of a winner in a slow growth U.S. economy. I loved the composition that drove the gross margin expansion. Take a look at the filing.