What Works, What Doesn't

 | Jun 18, 2013 | 7:13 AM EDT
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Can you ride out the end of bond buying?

We just had a correction based on that concept and I think the answer for most stocks is "NO," not if it is going to go on for months and months, which is what I would fear.

That's why I think you have to accept the fact that raising cash on days like yesterday in the groups that were hardest hit makes a ton of sense.

But what acted well in the downturn? What didn't give up the ghost? Two groups: tech and banks.

I recently spoke at TheStreetMonster Conference and I emphasized these two groups for different reasons. First, the banks will roar in a situation where the Fed stops suppressing interest rates because the best money they can make is by paying the curve, giving you bad prices for your CDs while they invest at better prices. That's how Jamie Dmon says JPMorgan (JPM) can make $2 billion more with a normalized yield curve than he does now. These stocks are classic weakness buys as people will continue to be confused about what drives bank stocks higher. They go higher on net interest margin either on their loans or their investments or both. An end to the buying will mean we are good to go as a nation for the first part of the earnings and the banks will be coining money on the second.

I would also argue that the international banks might be the best ones because we will get a taper if Bernanke and company believe that part of the reason why it is safe to cut back is that Europe is coming back. Remember, the euro is strong, that's a sign of continental strength, which means that JPM or Citi (C) or Goldman Sachs (GS) could be very right.

So, owning banks through the taper will be a good idea.

Second, the dry run revealed tremendous pent-up demand for old tech, here I am talking about disk drives, flash drives and semiconductors that have lots of cyclical growth to them. Here, again, Europe is incredibly important for tech earnings and I do not believe we will get a taper without Europe coming back and coming back to the point where it is obvious to all.

That means the drives and the flashes and the semis and even stocks like Hewlett-Packard (HPQ) are buys if we get some bad news on Wednesday afternoon. I love the fact that the world seems to be short the drive stocks and the hedge funds despise them. I love it because the drives trade on new construction of drive factories and there's been a shocking dearth of them.  You do not sell these stocks when that is the case because it means that inventory's lean, which is the best time to buy them.

Now what's not worth buying? I think we saw the future with that walloping that the REITs, the utilities and the MLPs had. That was your wake-up call to dump. I like these stocks very much, but the fire drill told you to stay away. Emerging markets will continue to be slaughtered because people never learn. And I believe that the home builders will keep rolling over until we actually see the quarters and we realize they weren't hurt that badly after all.

So, banks and tech work, bond market equivalents and emerging markets don't. That may be all you need to know going into taper time.

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