Sozzi's Day Ahead: What Mr. Market Has Told Me

Top athletes have long been quoted as finding a "zone" that leads to the achievement of unimaginable feats on the field, course or court. I'm no RG3, but I'm reasonably athletic, so I can completely relate to the "zone." It's as if time stands still. You are unaware of surroundings, and there is this effortless execution on an action that yields serious success on a public stage. Just thinking about this nirvana makes me excited. As someone who made financial services his life, I have learned that the "zone" is easily found in the world of studying markets and stocks. I am currently operating in one of these zones -- one I would characterize as having ideas emerge from a mystical black hole, and where the winning views and calls outnumber the duds that send the phone ringing off the hook.

Another aspect to this #StockZone is the freakish ability to start up a conversation with Mr. Market, and gain a ton of useful feedback in return for your time.

What Mr. Market Has Told Me

Alcoa's ( AA) earnings are apparently so meaningless that perhaps the SEC should consider banning the company from issuing them. Obviously, this is said tongue in check. But hello, people -- Alcoa's earnings were initially billed as a "solid beat," the stock popped and then realty set in that there is more behind an "expected" 1% production cut (thanks, China). The stock closed lower, leaving me to wonder -- as I hypothesized last week -- about the third-quarter health of companies that placed orders with Alcoa. It also had me wondering whether weakening corporate fundamentals will see stabilization by the fourth-quarter earnings season in January 2013.

To purchase Alcoa shares on a dip, or most industrials with similar business models and exposure to Europe and China, it's a both a physical and a mental bet that the severity of sales pressure and fleeting cost/expense leverage will level off. Pardon me if I don't want to drink the Kool-Aid yet.What commenced as a medium-sized snowball has picked up speed and size, as seen in commentary and actions by executives. Come take a tour of the fun tidbits I grabbed on Wednesday.

1. FedEx ( FDX) dropped its worldwide growth forecast, but I was left wondering if the market believes this is enough. Despite a world of mega cost cuts, the stock didn't zoom on an event that was very hyped

2. Wal-Mart ( WMT), under the radar, downwardly revised its expectations in key international markets and joined the list of companies calling out Japan -- you know, they do matter -- as a new source of risk.

So, I ask: After hearing these comments, do I pick up some Whirlpool ( WHR) on a pullback on the assumption that the U.S. housing recovery will offset (throwback: decouple) the economic storms continuing to brew overseas? Come on, guys, let's take a hard look in the mirror -- a mirror not covered in steam from the shower.

Honest Abe's Early-Innings Earnings-Season Lesson List

I'm totally all for buying a stock -- when I can remove a couple of these talking points from the Honest Abe list.

  • View with skepticism the opinion that China's economic growth will reaccelerate in the fourth quarter. The reads I am receiving is that China is becoming worse, and there is no benefit in consumer demand or business demand from infrastructure projects or liquidity injections.
  • If you could find a "Yum-Yum" stock, by all means grip it and rip it. Yum! Brands (YUM) had a bunch of intangibles that converged that propelled its stock price, including concerns on McDonalds's (MCD) hurting sector sentiment and uber worries on food inflation. To be a "Yum Yum" stock, the company has to have unjustified skepticism on its fundamentals derived from clear (emphasis on clear) sales and leverage catalysts.
  • The dot-connecting is largely skewed toward avoiding potential disasters, rather than unearthing opportunities. By this I mean that the commentary has been so poor, and earnings downgrades so alarming, that the search is on to exit companies that will trumpet these same tunes, as opposed to buying companies that may be doing decently.
  • Yum! Brands is the early outlier; earnings news is being sold.
  • Not one company I know of has mentioned anything related to the latest Federal Reserve efforts, but they've definitely intensified the rhetoric on the fiscal cliff -- most notably in Wal-Mart.
  • You will lose money earned in the summer rally if you fail to think on a granular level with regard to China. If growth is slowing, there is a big chance a company you own is not pushing through price increases, is discounting more merchandise, and is not moving as much product at cheaper prices as it hopes. This triggers a chain of events that impacts near- to medium-term operational performance. A good example is why a company like Caterpillar (CAT) would be cutting production -- its inventory is not in line to demand trends, and that inventory has to be worked down.

Honest Abe Also Says: If earnings season is "priced into" the market, the SPDR S&P 500 ( SPY) will land buying near the key support level that is poised for a test. Watch it.

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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