The Follow-the-Futures Playbook

 | Mar 02, 2014 | 10:00 PM EST  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

bmy

,

mmm

,

ba

,

utx

,

ko

Don't just stand there, sell, especially if everyone else is selling or will be selling. Let the S&P futures, down so huge, dictate your emotions, and, if we don't open down big consider it a blessing and bang out as much as you can because everyone is too complacent about this Ukraine thing, whatever the heck it is (you better not be or you are being way too glib and thoughtless).

There. I did it.

I totally spelled out the mindset that has been used pretty much every time a foreign financial or non-financial crisis has occurred, a process that has only been exacerbated as the futures and the ETFs and, most importantly, the algorithms have come to take control of our stock market.

I don't want to discuss the absurdity of it. I just want to explain how it happens and why. The stock market simply isn't able to discount this kind of news effectively because of its commoditization by the much more powerful instruments that dominate trading -- a main reason why I wrote "Get Rich Carefully" -- and we have to accept it and profit from it.

Now, I can name the caveats. Those who ignored the Southeast Asian and Russian crises near the end of the 1990s got walloped initially and there was a degree of common sense to that because we didn't realize at the time how many domestic hedge funds were linked to those areas and had to sell something to raise cash, so they sold what's easiest and that's the U.S. equity market. It could be like the European crisis that peaked out in November of 2011, with Italian bond yields at twice the level they are now, something that directly impacted us because our banks had such huge and uncordoned exposure to those markets.

Plus, war fears don't peak immediately and wars, civil or otherwise, can escalate. We know that when Egypt fell we had several days' worth of selling. Libya's changing of the guard dinged us. All Israeli wars have impacted our markets. A standoff over Syrian chemical weapons caused our markets to take a momentary hit. There have been a half-dozen instances where North Korea has sent us down with sabre rattling.

Even turmoil in emerging markets without follow-through can create selloffs, as we know from Cyprus, Argentina and Turkey most recently.

But in each of these non-financial squalls, the selling let up rather quickly and all you had were sell-short and cover trades that roiled our market, shook out a lot of fearful souls and then created a runway to start anew with stronger hands.

No matter. I can review every one of these at length. The simple fact is that ever since the futures took over the stock market, the selloffs have been so all-encompassing that they beget sellers in their own right.

In "Get Rich Carefully" I detail the now-time-honored pattern of all of these situations. How all go down on Day 1 (and I mean all). On Day 2 all go down again as those who were brain dead on Day 1 take action and the media makes Day 2 Ukraine even more DEFCON-like. But near the end of Day 2, the Bristol-Myers (BMY) price-to-earnings model sets in, the one where we ask ourselves "what does the Ukraine have to do with the price-to-earnings ratio of Bristol-Myers?"

What's funny is when I say it, and I will most likely do so, it will sound Pollyanna-ish and I will be ridiculed by the people who are always so much smarter than I am, people like Jim Grant and Marc Faber who, time and again, have managed to be true intellectuals about these situations. Their doom and righteous gloom jeremiads are so much more in synch and have so much more gravitas than I have, that you virtually have to do what they say or else.

Or else what?

Or else seem like a lightweight. The funny thing is that even after they have been wrong for literally thousands of unadmitted Dow Jones points, they still are smarter than I am! Oh well. Jealousy and comparisons are odious. But remember, when you see them you know the BMY theorem is about to take hold.

Day 3 sees the Bristol-Coca-Cola (KO) cohort (don't worry, bad sales don't matter yet with the Buffett-backed Coke, even as Jim Stewart lays out the alternative case in the New York Times this weekend) actually go higher. Everything else keeps falling though as the Ukraine crisis worsens.

Day 4? Ukraine crisis stays worse, plus this time we are on the eve of the employment report. We rally ahead of it, most likely, though as the shorts lock in profits or are scared that the market's oversold and due for rally after a hefty decline.

Day 5? Labor and Ukraine again, but we see stabilization in the high-growth stocks, either because the economy is weak and managers want growth or because the economy's OK, but the employment number is now behind us.

Then the worry about the weekend and the Ukraine, and when nothing truly dastardly happens almost all stocks open up and we start putting it behind us. Boeing (BA), 3M (MMM) and United Tech (UTX) lead the charge.

That's pretty much the life cycle. Those who buy on Day 1 tend to not do well at all, which emboldens the sellers on Day 2. but beginning at the end of Day 2 you need to break out the shopping list. Heaven forbid we get down 5-6% on this and then you just have to dust off what worked well beginning three weeks ago.

Usual caveat: If it escalates to nuclear war, we all get killed, which truly does hurt the P/E of Bristol-Myers. Otherwise, it's downturn-business-as-usual, with the most salient point being that the first buying opportunity comes when Grant-Faber bowl us over with their genius. Don't fire until you see the whites of their brilliance.

Columnist Conversations

The bearish star cluster on the Starbucks (SBUX) chart that I highlighted last week preceded price action this...
Ford is working on its third straight gain following two days of steep loses to start this week. At this...
Market is holding on for gains for now but think Doug Kass is right and could see some decent profit taking by...
I have a full blown article surrounding the U.S. Retail Sector coming out on soon, but for now let's just lo...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.