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This is sure to be an interesting week (like any other week is not?!) as we enter the full swing of the first full trading week of the year, important economic releases and the corporate pre-announcement season. The pre-announcement season is probably the most important factor above because seasonal factors are likely to skew Friday's monthly payroll employment report and just because it is the first full week of trading shouldn't make that much of a difference.

The quarterly pre-announcement season refers to the period immediately prior to the reporting of actual quarterly results when companies let investors know if revenues or earnings are going to be out of line - either positive or negative. Home Depot (HD) was the most recent example of how the pre-announcement season works. There is only one difference this quarter - HD reacted negatively enough, but it didn't impact the whole market suggesting that traders and investors aren't exactly giddy regarding earnings as we head into the new year. One thing is for sure, sluggish top line growth and margin pressure has been a hallmark for the past few years and corporate America is in a period where there are two choices; find a way to deal with it and show growth, or hope it goes away. Guess which one will be rewarded?

As I drove in this morning, I couldn't help but reflect on the Home Depot (HD) announcement of weaker-than-anticipated results. First, it is stunning that a company who a couple quarters ago was comfortable giving MULTI-YEAR guidance has disappointed two quarters in a row. Second, I don't follow the exact readings of percentage of companies pre-announcing positive or negative, but I sense that there has been fewer high profile negative pre-announcements so far. Many would attribute that to the holidays, but in a new world (not so new anymore) of Regulation FD, if you know you are going to be light, aren't you supposed to report it? Clearly, there will be some more negative reports, but thus far it feels better than some of the prior quarters.

At this point, the market remains in the twilight zone where it seems like breakouts and breakdowns are imminent and news is all over the place. In this zone psychology is the most important ingredient and right now it is very mixed. After reaching levels of oversold where the market should bounce, while it took some time to materialize, the market did bounce and is no longer in oversold territory over the near or intermediate-term. That makes the risk/reward near-term a little less attractive. The only reason that I could see to be a buyer even for a trade was the oversold condition and psychology that was ripe for a bounce. Now that the market is bouncing, I no longer have that argument. Again, I believe the most important aspect of this rally is how one uses it to their advantage. While, there is some level of upside left and the prospects for a retest of early December levels remain solid - that would only leave 2-3% upside in the S&P 500.

For arguments sake, lets say there is 5% upside near-term from current levels, one must identify the risk associated with that 5%, and for those that were bemoaning their long exposure a week ago should think about using this strength to adjust their portfolio to a more comfortable level of exposure. Not much has changed but the psychology and that is no longer in favor of a snap back because we have already had it.
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