This is going to be a simple tutorial today. If you are still bullish on the market, the room may be starting to feel too crowded. I will assume the role of attention-seeking instigator by yelling "Fire!" in that crowded room. Arguably, in the past four consecutive sessions, domestic economic reads (includes initial fourth-quarter earnings guidance) and the political headlines have worsened, and that is inching its way into stock prices (or for you bookworms, valuations). I am disturbed by what I am seeing in the markets, whether it's how connected groups are acting (truckers trading down in tandem with consumer discretionary) or in minute things that are not so minute but nobody is bothering to pay attention. In all honesty, when I close my eyes of late I have visualized stock prices sitting on a three-legged stool and termites gnawing at the stool's legs, without stock prices having full awareness. "FIRE!"
The Dead Pool
Here is another layer of ugliness to print out and distribute to friends:
- Investors are being exposed to data head-fakes, and over time that tends to erode confidence (if valuations are cheap enough, you could wager on data troughs, but valuations are not attractive to me now and data are only in the preliminary stages of incorporating the fiscal cliff's first set of results). For example, durable goods are favorable on the non-defense component in October, and ISM is bad.
- Stocks are failing technical tests, and this is what I mean. Percentage declines are accelerating at key moving averages from session to session. I am witnessing a stealth dump-and-go strategy, likely by the smart money trying to keep the dumb money dumb by not wholesale dumping (let's be clear: the smart money has a well-articulated directive that is being executed).
- No love for a strong quarter in a hot sector, e.g., Toll Brothers (TOL). In fact, the S&P Homebuilder Index closed down 0.4% on Tuesday after logging a 1% gain earlier in the period.
- A dreary pre-announcement from Darden (DRI) is ruled by the market as very negative to comparable companies; any share gain stories are ignored. I read Darden's news as consumer getting in touch with their inner fiscal cliff and that requires Darden to offer greater promotional frequency and magnitude. Price war? Toss Darden's historical valuation in the trash -- "new normal" consumer stuff once more. Winners: eat-at-home stocks.
- SPDR Gold (GLD) and iShares Silver (SLV) are two investment vehicles that have fallen into no man's land prior to a Fed meeting (which always brings with it rampant chatter of inflation). It's telling on the momentum behind corporate pricing power and the impact the Fed could have against fiscal upheaval.
Bigger Picture Thoughts
- Special dividends equal money out the door to fund future earnings growth equal a need to seriously revaluate long-term multiples and free-cash-flow projections on any company doing this gimmick (this does not benefit investors with a longer-term horizon -- pension funds must be upset).
- For those jumping up and down on 2013 employment acceleration, try this on for size: pull up six-month charts on Men's Wearhouse (MW) and Jos A. Bank (JOSB).
Market Call
Bearish. Defined, either completely on the sidelines (I prefer this option) with cash on hand, an overweight position in defensive sectors (as I noted Tuesday, I am concerned about correlation should fiscal cliff uproot the markets), or a few shorts on stocks that are clearly technically disintegrating. Suddenly, the China recovery theme has become a little long in the tooth, tossing the debate back to the severe amount of unknowns inside this month domestically. By the way, a Darden pre-announcement does nothing to alleviate concerns on fourth-quarter earnings season; thus far, earnings season is far off in the distance, but you had better gobble up the early inning clues now because it's looking ugly (see tech warnings and lagging nature of important tech indices).
At the time of publication, Sozzi had no positions in the stocks mentioned.