It kind of hurt me to hear Clubber Lang call Rocky a "paper champion" in Rocky III. After all, I witnessed America's champ endure all those bloody battles with Apollo Creed in his rise to relevance. I indirectly felt every nose-breaking jab to the face. In my eyes, the Italian Stallion was most certainly not a paper champion -- that is, a superstar who has gotten there by triumphing over unimpressive opponents. The idea is that this person essentially stays on top amid a consistent stream of weak challengers, and the real threats to the throne are kept at bay until some future date.
But I do humbly advise you to beware of "paper champion stock rallies." These one- or two-day advances in the market have the following characteristics.
Speculation increases on a series of positive outcomes well into the distance, with little near-term evidence to support those claims.
Examples: Suddenly, select China data are being linked to express a case for "oversold" areas of the market, such as miners and heavy industrials. Europe's industrial-production figures also bolted on to this logic for added thesis support.Excessive optimism is thrown the direction of backwards-looking data that could arguably constitute a near-term peak -- which, obviously, we find out later. Examples: Honest Abe told me that the market needs to cool its jets on extrapolating September retail sales as the best thing since sliced bread -- and ditto on consumer confidence. Each is a reflection of prior advances in housing values and stock prices, and skewed to higher-income households, though I concede mortgage refinances have helped. If you dig deeply, I think you'll find a story of incremental middle-to-low-income financial stress before you detect any knowledge on the range of fiscal-cliff outcomes. My sense is that the average household is still not thinking about the fiscal cliff. It will sneak up on them. Deep thought on this matter: We'll see an abysmal reaction by most retail stocks to the September retail sales report, as if to proclaim to the masses, "Dude, this stuff is priced in." Of particular concern is the action in Ulta Salon (ULTA - Get Report), a retailer of very discretionary products that has basically been a bet on middle-income splurging and replenishment after recession cutbacks. (September's personal-care sales, according to Uncle Sam, was one of the weaker-performing categories).
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