Sozzi's Day Ahead: Sure Smells Fishy

Feeling pretty spirited today? Perhaps your football team won, leading to an excited Facebook ( FB) post that generated a ton of drunken "likes" from friends. Perhaps you scored a mega deal at Wal-Mart ( WMT) on a Halloween costume (but not on candy -- Hershey's ( HSY) price increases, announced last year, are only now kicking in). Surely that was wonderful news. As for myself, I happened to find enjoyment in polishing my car's plastic light covers in the rain to remove cloudiness, compliments of a nifty product from Pep Boys ( PBY). (Yet, despite a pleasing customer-service experience here, AutoZone ( AZO) remains the No. 1 in that space.)

Oh, and in case we've all forgotten, the stock market managed to exhibit a little fight last week.

I must be blunt, though: From the day-to-day action to the explanations for the buying, the entire shebang smelled like nasty fish. Whatever tricks you use for stock-picking and for the timing of such, my own approach, at least, did not support the notion that the market has found its next positive fundamental catalyst. Let me also state that such a catalyst will have to be found in corporate America - because, regardless of who wins the presidency, decisions will be enacted that will clip growth in the front half of 2013.

But therein is the main issue with buying stocks today. Corporate America will find it hard to be positive out of fear of being completely wrong, and of having to answer to angry shareholders once the stock drops 13% on earnings day in January 2013. What would constitute a positive stance by management teams? Seeing as loads of companies are sitting on mounds of cash, a couple of simple items would be a guide to higher year-on-year capital expenditures in 2013, or signal that meaningful shareholder-friendly actions are forthcoming.

Monday Deep Thoughts

"If earnings season bucks the trend of disturbing bottom-line warnings, would that be a serious buy signal?" (Or, if you want to sound smart: a "tell")

My Take: As we peer into 2013, we see that the predominant recent driver of earnings -- efficiency gains -- can't possibly be sustainable. It feels as if companies have begun to saw into bone in making an earnings number. We need volume and pricing improvement -- and, in this regard, the risk remains to the side of disappointment. In fact, I have started to wonder about corporate pricing going forward. If companies are obsessed with having flexible workforces and with pleasing the Street in order to generate profit margins near their prior cyclical peak on lower revenue, won't that inhibit product innovation? Hey, this is deep stuff, man.

"Why is the market telling me it's conflicted?"

My Take: Shares of Alcoa ( AA) have charted an interesting path since the company's July 9 earnings report. The stock fell July 10, bottomed July 25, rose 23% from that point till Sept. 14 and has since shed 8%. Beginning Sept. 14, Alcoa shares have lagged the iShares MSCI Emerging Markets Index ( EEM), which is important, since Alcoa still sounded fairly bullish on emerging markets back in the second quarter. The stock has also lagged the SPDR S&P 500 ( SPY) and the SPDR Dow Jones Industrial Average ETF ( DIA).

On Oct. 3, Alcoa was able to hold the 50-day moving average on decent volume. Still -- and not to be a Debbie Downer -- take notice of these facts. Transport stocks are issuing earnings warnings while Alcoa's shares have been hanging tough. Meanwhile aluminum-can users Pepsico ( PEP) and Coca-Cola ( KO), both with their own emerging-market exposures, have seen shares trade beneath their 50-day moving averages since Sept. 12 and Aug. 22, respectively.

I think the other stocks mentioned here are flashing the yellow caution light that should be coming from Alcoa. The fact that this name is not sending out such signals leaves me hesitant as earnings season commences. I would have arrived more confidently had the market reined it in again last week, but we saw the exact opposite take place, and potentially misguided enthusiasm is running as wild as Hulkamania.

The market, in my opinion, requires more than a sea of earnings beats coming in $0.01 above estimates as top-line figures lag below consensus for another quarter. In order to justify what we have witnessed in the past five days, companies will have to exit the gate showing improved revenue results on a sequential basis, as well as stronger bottom-line beats. It's a tall order, no?

Honest Abe's Employment-Report Quickie Take

A bunch of facts and figures were tossed around after the jobs report, and not too many folks explained why the market ultimately sold the news into the close. Here is Honest Abe's brief assessment.

If you drill into where the jobs were created in September, it was in construction -- which is good to see -- and, to a lesser extent, in retail. There wasn't much spill-over into other sectors that make "stuff," such as many components in manufacturing, transportation and financial services (outside of credit origination). Basically, then, the report revealed hiring fears out of human-resource departments.

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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