An Anna Karenina Market

 | Apr 09, 2014 | 3:55 PM EDT  | Comments
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What causes a decline to stop in its tracks? What ended this particular decline, the one that started April 2 and accelerated almost into the close Monday? How come they end so differently from how they begin?

We have to resort to a stock-trading genius to figure this one out, someone you won't be seeing on "Squawk Box" as a Market Master any time soon, however. That's right, we have to go to the source: Leo Tolstoy, from that seminal stock treatise Anna Karenina. Of course, Tolstoy wasn't technically speaking of rallies and selloffs when he wrote, "All happy families are alike; each unhappy family is unhappy in its own way." Nevertheless, it sure holds up under close scrutiny because rallies occur when everything's calm and the Fed's on board and earnings are good and money is flowing in.

But selloffs? Each time they are pretty darned different. This selloff had at its roots a Fed that seemed to want to get tough on inflation, bankers who kept pumping out stocks, insiders who have dumped stock like mad, and hedge funds that have been put through the shredder.

Plus, it occurred in a vacuum of news -- one that made people think it couldn't be good because the smattering of corporate news we have gotten between earnings seasons was distinctly tepid, with the only tempering coming from those who believe in the weather fairy. Meaning, we had to take the same leap of faith about the weather as our kids have about the tooth fairy.

So, let's deconstruct the bottom to see what could cause it.

First, people got real negative real fast, including the prototypical "get out now" calls that frequently cause a panic whoosh bottom. In fact, I know it isn't right to invest in irony, but the scariest "get out now" I have heard in a while was uttered after the close of trading Monday, and that sure was a wake-up call that panic was upon us. It defined panic and, as I always tell you, panic is not an investment strategy.

Second, we managed to peel back the selling onion yesterday and it was only then that we discovered there were big hedge funds in redemption hell, frantically either giving back money or de-risking. (That's a fancy term meaning dumping everything and getting off margin because of increasing volatility, which is another fancy term for "Man, have I been wrong, I am getting my head handed to me and I am an idiot but I am blaming it on the market not me, so you won't take my money away.")

As I said Tuesday, I had no idea why certain stocks were down. I figured it had to be the fundamentals. Until I found out that some of the wounded hedge funds were selling stock. Wounded hedge funds are like wounded tigers or tiger cubs. If you want to know what happens to these hobbled beasts, I have another rigorous stock treatise to turn you on to, one that, again, wasn't really meant to describe hurting hedge funds but it will suffice: Man-Eaters of Kumaon by the legendary market master and hunter-turned-conservationist Jim Corbett. Once we knew that the holders, not the companies, were behind a huge part of the selling of the leaders, buyers summoned some courage and went to work buying. Of course, wiseguy shortsellers knew about the wounded hedge funds ahead of the news flow and had been shooting against them, forcing their stocks down with short sales. Those shorts had to be brought in. Way too dangerous to keep betting against stocks now that we know a proximate cause has been found out by everyone.

The bold buyers were aided by analysts who had been waiting for a cessation of the shelling to come out of their foxholes to make bold calls that the sellers may regret their selling. This time I want to commend Jordan Rohan of Stifel, who stuck his head out first, even while white phosphorous and high explosive artillery was still going off, and said time to buy Facebook (FB). Given that Facebook's willy nilly billion-dollar acquisitions scared people and blew out the crouching now-wounded tigers, you couldn't get a more bold call. When Facebook actually closed up Monday, which was, if you recall, a truly hideous day, that was the signal of a magnificently timed call. Here's a snippet of his genius research: After the pullback four picks for earnings-related outperformance, that also called out RetailMeNot, Yahoo and Netflix. It is the polar opposite of the "get out now" nonsense. I have shared many a foxhole with Jordan. He's been bloodied many a time, which is just what you need -- just the tutorial that's required to make such an exquisite call.

Since then, a host of analysts has embraced the highfliers, especially Facebook, but you get a bottom when someone who knows what they look like, knows how they are based in fear, makes the call. Congratulations, Jordan.

It takes more than that, though. I have said over and over again that the initial public offering stunts, the endless software-as-a-service and biotech deals have to stop flooding the marketplace with their wares. I think that today's busted La Quinta (LQ) deal is a wake-up call that the dogs won't eat the merchandise any more, and I will have more on that later. You need to staunch the flow of cloud-based whatevers in order to get back to buying the original cloud-based companies, the ones with earnings or at least some positive cash flow.

Next up? How about some positive business news? Look no further than the multi-scorned Alcoa (AA), which came on "Mad Money" just last night and talked about turns in aerospace, autos, non-residential construction and trucks. Those are all the needle-movers in an economy, for heaven's sake, and Alcoa's Klaus Kleinfeld said they are all trending higher. Pow, bears, right in the kisser.

We also had international turbulence that had to be settled. We keep hearing about Russian troops massing on Ukrainian borders, and that causes Europe to go down, sending us in the usual tailspin. Then we hear that its business as usual, so Europe goes higher and so do we.

Finally, in this it-takes-a-village-like scenario, you need the Fed to do something positive because there are so many Fed watchers that you can't beat them off with a stick. Sure enough, right on cue, we find out that the Fed didn't really want us to think that it was about to raise short rates and it was all a big mistake, a do-over. Hey, rookie Fed chief, rookie mistake. It happens.

Next thing you know, the unhappy family gets all happy and the people who panicked are blown out, the sellers feel like morons and even get remorse and start buying and we catch a rally. Of course, now the technicians who were saying that we were on the verge of blowing up the Hindenburg or watching the omen or experiencing a death cross have to revise themselves and talk reverse heads-and-shoulders and cups-and-handles and all things positive. It's as if we were looking at the chart upside down. Don't laugh, I had hung a Rothko print upside down in my law school dorm room for seven months before a date informed me of my lack of Spots and Dots acumen. Yep, that's how it happens, and fortunately, the bulls don't throw themselves on railroad track like the lamented Anna Karenina, and instead live happily ever after in Peace before War begins again.

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