Reading This Fed Rotation

 | Sep 19, 2013 | 2:13 PM EDT  | Comments
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Stock quotes in this article:

cag

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gis

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pep

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mcd

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frt

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dis

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pru

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lnc

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trv

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utx

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mmm

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ba

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hon

Sometimes the market has no idea what to do. This is one of those times.

First, we have decided that the Fed is all-powerful and because it got rates down to 2.75% on the 10-year Treasury note, we should sell stocks that do well in a recession, especially if they delivered just in-line earnings.

So consumer packaged goods company ConAgra (CAG), which reported pretty much exactly what it said it would nine days ago, gets clobbered, going down another dollar on top of the two bucks it lost the day of the preannouncement. Why not? Who needs an underperforming food company when the Fed just greenlighted an economic expansion. Who needs Slim Jims when we can buy stocks of companies that make cabinets and washing machines? Same with General Mills (GIS). This fantastic company reported and in-line number and gave in-line guidance, and it has been eviscerated. Who needs Cheerios when we can buy railroad stocks?

What were we thinking when the S&P 500 futures took up the slower growing PepsiCo (PEP) on a day when the Fed decided it wasn't going to cut back its bond buying. Silly us, ring the register on PepsiCo and go buy the stock of a shirt company, which is how PepsiCo can drop $1.40.

McDonald's (MCD) gives you a nice 5% dividend boost, bringing the yield up to 3.3%. But who needs a fast-food-restaurant stock when we can buy a once-lagging real estate investment trust company like Federal Realty (FRT), which I had on Mad Money last night?

Ah, but wait a second. As much as the Fed has decided to fix things so that all is better domestically, what do we do with the stocks of companies we know aren't having good quarters but could be saved by the Fed next quartet? Will the market look through a bad quarter to get to one that will be boosted by a non-taper?

I don't think so, which is why the market is selling down the stocks of the homebuilders that it took up yesterday. We know from the announcement of sales of previously owned homes today that while the numbers were at a six-year high, the commentary from the National Association of Realtors was incredibly downbeat. Lawrence Yun, chief economist of the association, called it "the last hurrah" and said that the market may be experiencing a "temporary peak" as rising rates and declining affordability bring that number down in the future. Hardly reassuring.

Meanwhile, if the Fed is making things easy again, that's terrific for traveling and spending, right? Then why did the market take the Morgan Stanley downgrade of Disney (DIS) so hard, whacking that stock for a $1.35 loss?

Plus, it's hard as all get out to figure out what to do with the financials. Lots of banks and insurers were going up because they do better in a rising rate environment. But now we have a falling rate environment, so we have to sell what we liked so much because of the Fed's actions. So the regional banks all go down the drain and big insurers like Prudential (PRU) or Lincoln National (LNC) (which I talked about last night as one of the best performers in the market this year) get crushed. But wait a second -- Travelers (TRV) catches an upgrade and flies up a dollar because its quarter's terrific. Who can keep up with this insanity?

It's helpful in moments like this to remind people that you want to buy companies that aren't affected by this vortex, companies like the big industrial enterprises that the Fed does not control with its tapering. You want to buy stocks like United Technologies (UTX), 3M (MMM) and Emerson Electric (EMR), which are levered to a turn in Europe and newfound strength in China. Or stocks like Boeing (BA) and Honeywell (HON), which are levered to aerospace, which, again, has nothing to do with the Fed. Only buy the Fed-related stocks if you are certain they will blow away numbers here and now because no, the market will not look through earnings. It will sell off disappointers, as it always does.

In the end, accept that when the market's truly surprised by an act of the Fed, many people reverse field, many people make mistakes and many people have no idea, but they take action anyway.

Relax, take a breath and recognize that if you knew a company was doing poorly now it won't be saved by the Fed when it reports. After yesterday's big run, they are sells.

But the ones that are doing well? If they are down because of this silly rotation, those are the ones to buy.

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