The Day Ahead: And Suddenly, Stocks are Greaaat!

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.

Is there a series of events that stands to bring a ton of high-quality stocks into the bullish mix?

Mr. Market stalks all walks of life to determine fair value for stocks. In doing so, he builds conclusions from one event to another. Unfortunately, at this very moment I have difficulty telling you to buy stocks on the following made-of-paper thesis: The fiscal cliff has been mitigated; hence, stocks are oversold; most companies will do A-OK in a the first half of 2013, even with a potential U.S. gross domestic product of 0.5% to 1%; so every stock off your watch list or buy an index fund.

Look, I thought long and hard on the tone of this piece. That much is for sure. Does my continued caution really represent the extent of the bearishness held by similarly minded individuals, and is that the platform for stocks to climb this Wall of Worry thing? Do I kick it September 2009 style and become bullish as the masses suggest a "once-in-a-lifetime buying opportunity," essentially tossing in the trash valuable and painful lessons learned?

When all is said and done, I prefer the market to earn my trust back. Who cares if the precise bottom isn't picked? I am not trying to light a cigar and yell, "Yeahhh, buddy, I was right." Instead, I want even the slightest bit of confirmation that the out-of-the-blue triple-digit down sessions are largely finished for this cycle (which began mid-September), and that successive events are on the horizon that will build a groundwork to driving valuations higher.

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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