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The Day Ahead: Snipe the Bull -- or the Bear

Newly Born Bears Say . . .

The raw meat for the bulls: Investor sentiment has approached levels that, in the spring of 2010 and the summer of 2012, signaled an end to corrections in those periods. Here's what I continue to wrestle with: Is this the beginning of the correction or the end of the correction? I lean toward the position that more selling is in the cards: The S&P 500, at an average 12.1x forward price-to-earnings multiple -- well off 10-year average -- says stocks are pricing in either modest first-quarter gross domestic product growth, or a modest decline.

What's not priced in is more downside risk borne of an economy that feels as if it's virtually at a standstill -- because this could further delay capital-expenditure plans, impact spring retail sales and so on. While I prefer the comfy confines of Club Reality, Mr. Market has latched onto these optimistic assumptions:

  • Top marginal tax rates go to 36% and 39.6%, not far removed from what we're seeing at present.
  • Sequestration disaster story avoided
  • Tax code revamped -- though removing certain deductions will make consumer spending rather interesting to observe come March
  • 2013 is an adjustment year, not a recession year, and companies with lean expense bases could do OK against that backdrop.
  • Stocks are trading above their 50-day moving average at the lowest level in a year (an oversold indicator).

Fat Bears Say . . .

¿ In addition to what I've outlined above, the Dow has slightly underperformed the S&P 500 since the September high, and transport names such as FedEx (FDX) and UPS (UPS) continue to act atrociously. Copper had a bounce last week, but I fancy that was more related to China. Bottom line: I want a greater number of positive signals to serve as confirmation.

Boy, do I want to snipe the bear and carry the flag back to the bull camp, Call of Duty style. Being a member of Club Realty is only fun until the tide turns, and then you look like a fool holding on to prior battle wins. Nonetheless, I want to see stocks heal a bit from the large chart gash seen from mid-September to mid-November, and I prefer to recommend chasing a tape up 2% instead of risking my reputation in order to fit in with others.

Such a tape-chase, by the way, would prove to me that oversold sentiment has turned, and become constructive, into unforeseen fundamental reasons. In other words, the future earnings streams of companies would then sidestep a huge bout of malaise.

All that said, before Black Friday I will add another stock -- Gap (GPS - Get Report) -- to my holiday-season shopping list, along with the already-named Dick's Sporting Goods (DKS) and TJ Maxx (TJX). I think Gap's fourth quarter will be particularly strong on same-store sales and operating profit due to stronger assortments; better in-stock levels, particularly at Old Navy; tailwinds from cotton-cost deflation; and consistent marketing across verticals.

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Chart of I:DJI
DOW 17,719.92 -78.57 -0.44%
S&P 500 2,080.41 -9.70 -0.46%
NASDAQ 5,108.6660 -18.8590 -0.37%

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