The Day Ahead: Pain All Around

Have you noticed the quiet evolution in how information is presented on a computer screen or tablet? Kudos to you if you've picked up on those pervasive action words used in headlines, and have felt that resultant itty-bitty burning sensation in your gut. There are a bunch of reasons for the use of these mentally stimulative words, and as I dig deeper into tech research, I'm learning there truly is an entire web of companies you don't know about, all making money from your mouse movements and eyeballs. I have often been told I resemble an "old soul," with my appreciation for simpler times. In today's world, such simplicity has been relegated to reviews of any Apple ( AAPL) product that leaves a Chinese manufacturing facility.

Today, in true throwback form, I am reminded of Rocky III's Clubber Lang, who offered a to-the-point prediction on the outcome of his fight with Rocky: "Pain." The single word said it all. There was no need to say "significant pain" or "here is why I will bring him pain" -- just "pain." I would venture that you, the mighty yet inquisitive investor, is experiencing a bout of pain as well.

Last week, if you were guided by people other than myself, you would have considered that turbulence to be a mere blip on the radar screen in a flight destined to land in a fruit-filled field. This week, even as the bloodletting on the Street has quickened, you are being told -- again, by people other than myself -- to hold onto winning positions, or basically stand pat. Hasn't this back-and-forth guidance brought pain to your chest, seeing as every session is flashing valid reasons to be short-term cautious?

The backdrop for stocks continues to evolve, so much so that the market has given back the Bernanke Day gains. Are we worse off today than we were prior to the day Federal Reserve chief Ben Bernanke announced its third round of quantitative easing, a controversial plan that could boost inflation as the economy surprises to the downside? Are the Fed's magic powers officially useless in a world that tends to recouple after momentarily satisfying the voracious demands of stock-and-bond investors?

The answers to these burning, life-changing questions are being weighed daily by the market's hidden internal pricing mechanism. This is vastly different from conditions pre-Bernanke Day, when buying stocks was grand because more free money was about to be sent down in bags from a helicopter.

The daily notes I compile on the markets build a story -- a picture, if you will. I encourage you to cut and paste Wednesday's " Eight Market Signs That Make Me Sad for the Longs" and add the fresh warning signals below. Then hang them on the refrigerator. Ultimately, the signals tell a story of a market still fighting to reach terra firma following a transformative event, and they lead to that transformative event. In fact, it's difficult to put together a list of items that would get me more encouraged; the "tells" are not showing their faces at the moment.

A Market Rally in Flames: Cliff Notes Continued

  • Downgraded stocks have been met with harsh market reactions -- for example, in Electronic Arts (EA). Message: exuberance is still priced into valuations.
  • Two interconnected sectors that had run higher neck-in-neck -- homebuilders and financials -- are now cooling for a multitude of reasons. These include financials on the eurozone news flare, as well as perceived valuation risk on homebuilders.
  • Money flowing from consumer-discretionary names is being funneled into consumer staples, but not meaningfully so. Message: This is a classic lack of appetite for risk amid uncertainty. As a side note, Treasury bond yields have fallen for eight straight days.
  • Market is beginning to challenge moments that had been initially cheered -- for instance, the "whatever it takes" line from European Central Bank President Mario Draghi. It feels as if the bond market will push Spain into a bailout. This is a prime example of the problems arising from stimulus; powerful words heaved into a global news cycle; and -- as it pertains to the European Union -- a fractured union.
  • Pockets of intraday market reversals have not been maintained into the close.

Financial Fun Fact

According to Bloomberg, the S&P Homebuilding Index is at its most expensive level ever relative to the S&P 500.

At the time of publication, Sozzi had no positions in the stocks mentioned, although positions may change at any time.

Brian Sozzi is Chief Equities Analyst for NBG Productions. In this capacity, he is responsible for developing independent financial content and actionable stock recommendations (including ratings and price targets) for an institutional and retail investor base. In addition, Sozzi is the Editor in Chief of the "Decoding Wall St." investor education online platform.

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