Like I said Friday, this selloff is not a garden variety decline. It's a reset, something that gets us back to where we have to go before we can maintain a real, not parabolic advance.
Why is that? Why are we falling as we are? Let's go down the list and you will see why.
First, here's an obvious one if you are me. For the first time since I started the show, I can't find a CEO who believes his or her stock is cheap. When I talk to CEOs I am struck by their wonderment about how their stocks got to these heights. No they are not debating the companies' fundamentals. They are, uniformly, the best they have ever been. But these are business people. They know how hard it is to take market share, to invent, to re-invent, to beat tough estimates. They recognize that business has its ups and downs and it's never a straight line. They tend to think their stocks should have the same trajectory, lifting slowly, in fits and starts. They don't trust what we call a parabolic move. They don't understand it. Nor do they think that their stocks are correlating correctly with their enterprise value. So many stocks trade in sync with the S&P 500 because of all of the index money coming in. That baffles those who are stewarding businesses that they know are not increasing in worth at anywhere near that pace.
Second, for the most part the gains have been made on the back of a tame mortal enemy: the bond market. There's a bizarre dichotomy going on in stocks. We had come to believe that what matters most is that the economy kicks into high gear. But as long as interest rates remained low, under 2.5% on the 10-year, the economic gains seemed unverified. Well, be careful what you wish for because when we ticked 2.8%, we started realizing that perhaps the economy has gotten too hot. We also recognized that not only could bonds be competitive to stocks in yield -- hence why the real estate investment trusts and utilities have been shelled so bad-they can indicate that perhaps stocks will be worth less in the outyears. We are in a good-is-now-bad world where if earnings and employment are running too hot the Fed will quickly become a formidable enemy. Plus higher rates make the worth of stocks in the outyears come down. You simply aren't willing to pay these high prices with rates rising as fast as they are.
On Friday the sellers came for the industrials which do badly when the Fed has to tighten too fast because they are worried about inflation. The bond market equivalents, the Procter & Gambles (PG) and the Johnson & Johnsons (JNJ) , have yields of 3.3% and 2.5% that just don't give you enough protection from the downside with treasurys yielding 2.8% We are not where we have to go on stocks or bonds. Conversely if rates go down we're probably close to a bottom. But we aren't there yet.
I want to crib from something my friend Scott Wapner mentioned when we were in Minneapolis for the big one, we don't have enough bears, enough skeptics. Research analysts and directors like to have price targets so they can say "okay, now might be the time to take some profits" as the targets were created in a different environment. But when these levels were hit, and in this market the bulls' targets were almost all hit, what happened? They raised their targets. They didn't get bearish; they stayed all in. That lack of discipline is now coming back to haunt those same bulls.
Third, I always like to consider the holders of stocks, what's the base, who shares the stocks with you. In the last three or four months we have lots of new investors who have changed their minds about the asset class and come back to it. They sense that stocks are safe again. Now they find out otherwise. Put yourself in their heads. Do they want to buy more as we go down? Or do they cut and run. I think it's the latter. There's too much froth, it has to be stamped out before we can advance which means we need the weak hands to back away or cash out entirely.
Fourth, the one leadership group we can trust when rates go higher, the banks, took a real whopping on Friday night when outgoing fed chairwoman Janet Yellen at last chastised Wells Fargo (WFC) . I cannot believe it took this one. It took the market by surprise and it was brutal, with a cap on the company's growth just when we thought we were in the ideal moment to buy the company's stock because of rising short and long rates-both good-as well as lower tax rates, a resurgent consumer and easier regulation.
Wells Fargo seemed to be in line to be able to raise its dividend aggressively and buy back a ton of stock. It was poised to be the great American bank stock again with no trading that could bring down the earnings. Now it's been taken out of the game and this is really important: the company immediately came back with a plan that still allows it to grow while it ameliorates the problem. Memo to Wells, just shut up and fix the problem. Don't tell us how you will be able to go around the spirit of the ruling and talk about growing anyway. Who the heck are their lawyers and why are they giving the CEO such bad advice? It's insane. They should read the report investigating the bank by Shearman & Sterling. It's devastating and a lot of it is about getting around the spirit of the law. Shameful. If Yellen were still running things I think she'd have a fit about their response. Maybe new Fed chief Jay Powell will, too.
But the bulls needed Wells' stock to keep going higher to support that important sector.
Fifth and finally, there is the stock of Apple (AAPL) . This stock is the most important and largest in the world. It is like Samson. It does have the ability to pull the whole edifice down. Yes it is that powerful. It needs to stabilize before the tech cohort, the biggest in the market, can go higher. But understand that it did give a forecast that was below the expectations of many. I have speculated that it could go to the $150s. I still think that happens. I also notice that Amazon (AMZN) , after that amazing, quarter, finds its stock not able to advance as it should after an amazing quarter. I think it's a buy but you could argue that if it can't go up now the market is too high.
We have no leadership group, nothing that looks ready to bottom and go higher. We need that. No big sell-off ends without a leadership team emerging, one or two sectors that simply have stopped, based, and then started to turn around. Without some generals we have nobody, anybody, worth following. Once we do, I will tell you that it is safe to buy more aggressively. As it is, club members know I have held off issuing any ActionAlertsPlus.Com bulletins to buy, with my first, a small one, coming out late this afternoon. We are up, up too much for all the reasons I just mentioned. But unlike what I said last week, it's getting too late to sell.