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Market Preview: The Trend Turns Ugly

 

Updated from 5:28 p.m. ET to include latest share prices, additional information on Starbucks's buyback program and President Obama's plan to meet with congressional leaders on Friday.

NEW YORK (TheStreet) -- It may be a stretch to say that old market adage about the trend being your friend applies right now but think of it this way: Your friend is telling you to stay away from stocks.

The major U.S. equity averages have spent the week in the red with most market watchers in agreement that the overarching reason is growing concern about whether the Democrats and Republicans will be able to compromise before the year's out and avoid sending the country over the fiscal cliff. That's it. Earnings season is winding down, the eurozone continues to be a mess, nothing new there.

The daily headlines will always provide some pretense for which way the broad market leans from session to session but right now there's nothing taking precedence over Wall Street's wondering about how the proceedings on Capitol Hill ultimately shake out.

"We believe that the direction of the U.S. market is easy to see," wrote Guild Investment Management in emailed commentary on Thursday. "If compromise reigns -- and we believe that it won't until after January 1, 2013 -- the markets will rise. We believe that U.S. politicians will be negotiating until January 1, 2013, or beyond, and that the cliff resolution will not be reached until sometime in January. In this case, U.S. stocks may move down or sideways through year's end."

The firm's worst-case scenario involves an ugly turn in the political rhetoric.

"If compromise turns into acrimony, regulatory pressures on business continue, and are combined with the much higher taxes as were proposed by President Obama in his news conference yesterday (he proposed raising taxes by $1.6 trillion rather than the $800 million he had previously proposed in Summer of 2011, which the market had expected), we anticipate a poor U.S. stock market for the next few months," Guild Investment said.

Right now, it really seems that simple because it's almost impossible to develop an investment thesis that takes both scenarios -- avoiding or going over the fiscal cliff -- into account. President Barack Obama is slated to meet with congressional leaders on Friday so hold onto your hats if that confab yields little more than posturing.

As for the rest of Friday's scheduled news, Foot Locker (FL) is reporting its third-quarter results before the opening bell, and the average estimate of analysts polled by Thomson Reuters is for a profit of 54 cents a share in the October-ended period on revenue of $1.47 billion.

Shares of the New York City-based athletic footwear and apparel retailer are up more than 30% so far this year, though they've pulled back some since hitting a 52-week high of $37.65 on Sept. 21. At current levels, the valuation compares well with the broad market with Foot Locker's stock trading at a forward price-to-earnings multiple of 11.7X vs. 13.4X for the S&P 500 as of Friday's close.

Sterne Agee is bullish on Foot Locker ahead of the print. The firm, which has a buy rating on the stock with a $41 price target, is 2 cents above the consensus, forecasting a profit of 56 cents a share in the third quarter and same-store sales growth of 7%.

"We would be buyers of FL due to the combination of strong innovation trends in the athletic footwear space, GM [gross margin] improvement opportunities, and a strong balance sheet," Sterne Agee said in a preview earlier this week.

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