Market Preview: A Warning Signal

Tickers in this article: SPY ^DJI ^GSPC ^IXIC WSM CSCO SPLS

Updated from 5:38 p.m. ET to include an updated share price for Cisco's stock in after-hours action and analyst commentary on the Fed minutes.

NEW YORK ( TheStreet) -- The bulls have been in control for the majority of 2012 but it's getting increasingly difficult to stay optimistic these days.

Especially after an ugly finish like the one witnessed on Wall Street Tuesday.

And right on time, the latest fund manager survey conducted by Bank of America/Merrill Lynch was a bit of mixed bag itself. The growth outlook jumped (a good thing) but there was also a warning signal to deal with as stocks tend to underperform bonds whenever the smart money embraces equities.

"While the fiscal cliff is viewed as by far the biggest tail risk, investor sentiment had clearly become more optimistic on growth & risk in recent weeks," B of A said of the poll's findings. "In the November FMS fund manager survey global growth expectations rose to 18-month high, China growth optimism exploded to 3-year highs and hedge fund net exposure to stocks rose to its highest (40%) since Jun'07."

The survey involved 248 participants with roughly $695 billion worth of assets under management with responses logged between Nov. 2-8. B of A noted the majority of respondents proffered their answers before the Nov. 6 presidential election.

While noting that cash holdings still remain at around average levels, B of A said it believes "some market caution is in order" precisely because the hedgies have augmented the stock component of their portfolios.

"Since 2007, whenever HF hedge fund exposure has exceeded 35%, SPX the S&P 500 has underperformed Treasuries by 700 basis points in the following month," B of A said.

As for Wednesday's scheduled news, Staples(SPLS) is reporting its third-quarter results before the opening bell, and the average estimate of analysts polled by Thomson Reuters is for a profit of 45 cents a share in the October-ended period on revenue of $6.45 billion.

Shares of the Framingham, Mass.-based office products retailer are down roughly 11% so far this year. The stock closed Tuesday at $11.25, down 33.5% since hitting a 52-week high of $16.93 on March 20.

The sell side is bearish ahead of the print with 14 of the 20 analysts covering Staples at hold (11), underperform (2), or sell (1) with the 12-month median price target sitting at $12.

UBS is in the neutral camp and it cut its price target to $11 from $12 on Tuesday. The firm anticipates the retailer will feel some pinch from weak PC sales but found something of a silver lining in this trend.

"The recent lessons from SPLS' peers shows that the tech category has been particularly soft as of late (PCs = 6% of SPLS sales)," UBS said. "This puts the bias to the downside for our -1% comp est for 3Q. The perverse benefit of not having these sales is that it's a gross margin good guy. This was the case with OMX OfficeMax & ODP Office Depot . SPLS GM gross margin compare is more difficult than last quarter, but we don't expect to see as much compression as the 51 bps basis points from 2Q. We est. a 25 bps decline."