Trading in Opposite World

 | Sep 15, 2011 | 3:23 PM EDT
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Retail sales are terrible. Buy retailers.

Regional Federal Reserve numbers show a slowdown in manufacturing. Buy manufacturers.

Inflation, a killer of everything financial, has begun to accelerate. Buy the financials.

Oil's stalled with too much supply according to OPEC. Buy the oils.

Europe's slowing down. Buy the tech stocks, which happen to have more exposure to Europe than just about any other group.

China's still braking its economy with threats of raisings rates. Buy the transports, which do huge business with China.

How can it be so counterintuitive and crazy? How can we do the opposite of what all the data points say? What the heck is that all about?

Okay, I will tell you. There are many, many crosscurrents at work and they are more powerful than individual sectors or stocks. Consider this market like a giant ocean with tides and riptides. When the tide is with you, you look like the greatest swimmer ever -- Mark Spitz or Michael Phelps. When the tide goes against you, or if there's a riptide, you are going down, even if you are a Spitz or a Phelps.

What makes this moment so hard is that the ocean these swimmers inhabit is not an economic ocean, it is a political ocean where tides are determined by politicians, some of whom are well known and some of whom are unknown.

Let's look at the political forces that are dominating trading.

First, the retailers. How can they be up, with Kohl's (KSS), Macy's (M) Ralph Lauren (RL) and VF Corp. (VFC) roaring? What's that about? It's because even though many parts of the president's job bill probably will not get passed, he might have enough votes to extend unemployment benefits. Despite tremendously downbeat employment numbers, including today's jobless claims, which were truly terrible, federal unemployment benefits have been a mainstay behind good retail sales numbers. Presidential politics comes to the rescue of the retail sector, so those stocks are going higher.

We know that the Federal Reserve data from various regions show that manufacturing is slowing, and that we can't look to that sector for any real strength, even though it was one of the bright spots in the recovery from the Great Recession. But the group has priced in not just a slowdown, but also an actual recession. Many of these stocks are down 15%, 20% and 25%. Even if we don't get a recession, they are too low. In other words, as bad as things may seem, people are expecting worse, and when we don't get it -- like when we heard from Cummins (CMI) earlier in this week that things are still gangbusters -- it's really hard to stay short. How hard? The other day a firm cut numbers for Caterpillar (CAT) and it went higher anyway. That's the tide taking CAT up even as you would expect CAT to go down because the numbers are going lower.

How can the financials be going up when we know they are making very little on loans, they are being hamstrung by federal and state lawsuits and their estimates are being sliced, as JPMorgan's (JPM) were yesterday? How can we ignore the budding inflation that the Consumer Price Index showed this morning and buy the stocks that almost always get hammered on any inflation scare?

Simple. Two words: Tim Geithner.

Yesterday, he told me that there will not be a European Lehman Brothers. While these stocks have been punished for their sins, with constant new regulations and prosecutions, the last 20% drop had to do with an expectation that the collapse of European banks will crush our banks. When Geithner took that off the table, whether you believe him or not, you had to figure that the big move down is done for now. So why not cover the shorts? (I don't actually think anyone is starting new positions in these miserable stocks.) Why stay short if the big catalyst, the collapse of some French bank, may not occur?

Sure, oil's doing nothing. But what happens if Europe doesn't go off line? What happens if there is no recession? Then it is going to turn out that Brent Crude is not done going up. If that's the case, you can own every oil and every driller, as they were pacing as if Brent was going to drop like West Texas Intermediate. Hmmm, maybe Tim Geithner was right when he told me that the price of oil is more fundamentally driven than I thought.

No one denies that Europe's getting weaker, even if systemic risk is off the table, and that means the European portion of tech earnings should get hurt. Every time that has happened, shorts have coined money betting against this group. Why is it different now? It's simple -- tech's seasonality, which tends to go up each year, easily trumps European weakness. Take the SOX. It has had extraordinary outperformance this week, which it tends to do every year as the big tech companies gear up for the holiday season build. You can actually bet that the seasonal tide can take up even the lowliest of techs like AMD (AMD) and Micron (MU). You can't bet against it.

Mineral and mining without China? That's not been the case for a long time. But understand that the U.S. dollar's losing against the euro, and traders purchase mineral and mining stocks when the dollar's weak. Given that the intervention by Western governments is designed in part to save the euro, this trend can overtake even the Chinese negativity.

You see, the politicians who are meddling in every single bit of capitalism are most surely in charge. We are in one of those moments where the politicians are trumpeting agendas that are viewed positively by the stock market. The politicians are the tide, our companies are surfing, and we've caught a wave stronger than just about anyone expected -- but not so strong as to cause a tsunami.

Enjoy the ride, but remember: Politicians are fickle and, in this era, they often fail; this run only reflects the success, not the failure, that has accompanied almost every single political initiative since the year began.

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