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The Day Ahead: And Suddenly, Stocks are Greaaat!

Stocks in this article: TJXEABACFDXUPS

That's it. I have totally entered zombie-killing zone and have decided to remove the metal-whooping stock from its case. It's time to debunk the nonsense being heaved on to the empty plates of investors.

One large day up in the markets doesn't mean a euphoric bull market

What I witnessed Monday was that the "Johnny Come Lately" shorts quickly closed shop amid fear of a crystallized sentiment shift on the fiscal cliff. There wasn't any robust buying in my neck of the woods, even as many stocks danced around their 50-day moving averages -- with call-outs including TJX (TJX), Electronic Arts (EA) and Bank of America (BAC) ).

Why wasn't there any robust buying -- otherwise known as "conviction" -- you ask? Simple: The market is being seduced by the slick words of elected officials, not the boring-as-heckfire stuff on which we feasted in college and various investment workshops. Better yet, while I have the metal whooping stock in hand, take note of the weak-ish action in homebuilders on mouth-watering existing home-sales results and the always-sweet musings from a National Association of Realtors economist.

But, wait, there's more! To me, there was no confirmation that the rally amounted to anything more than a bounce, as evidenced by the lack of action in FedEx (FDX) and UPS (UPS) and pure play truckers. Nov. 19 was "National Garbage Rally Day," led by such fundamentally flawed entities as a Deckers Outdoor (DECK).

Words of wisdom: Understand the difference between a true bullish reversal and an oversold reversal. In this case, it appears to have been the latter, led by traders who have cashed in their Apple (AAPL) chips and are now choosing to bid up high-beta names to lure in the suckers -- only to disappear at the first sign of political impasse or an intra-quarter earnings warning.

Ask yourself: "How would negative news be received by the market?"

In my experience, if a fundamental earnings-recovery story is to unfold, and we're seeing the preliminary stages of a reversal that predates it, a technically oversold market typically won't be the only argument strengthening the bullish thesis. Lines of defense have been erected, and they will serve to thwart any resurfacing reasons to become bearish. So amuse me and ponder these very important questions:

  • Would stocks react positively to a major sector earnings warning?
  • Why was sentiment slightly uprooted on news of a France credit downgrade?
  • If House Speaker John Boehner (R-OH) sounds less willing to work together, and ditto the president, will stocks fall?
  • Is a potential downgrade in the U.S. credit rating priced in to stocks? If not, shouldn't it be? After all, some form of austerity is the endgame to fiscal-cliff crisis.
  • Is a November jobs report infected by Hurricane Sandy, and the repercussions thereof prior to the holiday season, priced into stocks? (Think of the Main Street headlines.)

Words of wisdom: These are the types of questions that human investors ask themselves to cut through the sights and sounds created by machines.

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