Don't Fight the Correlation

 | Sep 09, 2011 | 1:50 PM EDT
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Correlation, 100% correlation. That's what this is about.

All stocks are correlated with the S&P and the S&P is correlated with European woes.

What does that mean?

Negatively, it means you take a beating until Europe resolves itself or dies down for a couple of days.

Positively, it means that about a quarter of this market, which is recession resistant, is going down even though Europe portends a recession. In other words, what is driving these stocks down because they are all correlated is what will ultimately drive up that quarter -- a recession.

We know a lot of companies won't be that much worse off. Take Starwood (HOT), which I own for How many times have they said business is good? Or PVH, with a considerable exposure to Europe, that said last night on my show that Europe is better than expected? Retail's strong for heaven's sake, both here and abroad.

But forget them. Let's say they are plain wrong or the weakness just hasn't hit yet. If they are plain wrong or it hasn't hit yet than you buy Bristol-Myers (BMY) and Coca Cola (KO) which will reverse soon enough. You can pick up some Colgate (CL) or JNJ.

Just not yet. Too early.

Let the correlation work for you, not against you.

Earlier this week I was reviled in Twitter for NOT sounding an all clear on Tuesday. I said we haven't resolved enough to believe that the big rally -- only slightly smaller than what's been lost today, but definitely smaller than what's been lost yesterday and today -- is "for real." People accused me of keeping them out of a big run.

Why did I do it?

Because the facts have to improve and, until they do, what's the point?

When the facts change, we'll be there. Maybe it will come at higher levels. But can we at least wait until they change and we don't get hit with the same litany: Greece, and the banks that hold Greek paper and the governments that are trying to make up their minds what to do.

Resolve the litany, then the risk will be substantially reduced for MANY stocks.

 Don't resolve the litany and we have a couple of days of this and it's back to the recession-resistant stocks and the high yielders once again.

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