On Day One of an onslaught, every stock in a sector gets slaughtered. On Day Two, the buyers look at the rubble and decide what should have been trashed and what's actually treasure.
We've seen this pattern before when the market makes snap judgments and then has to undo them. Usually, though, they take weeks, or at least days, to be undone.
And I have a theory why. In the old days, a company -- say a retailer -- would report a disgusting number or give a horrendous forecast and sellers would dump it and look askance at others similar to it, but would let those be that are part of the sector but in a much different zone within the cohort.
So, if Macy's (M) blows up as it did yesterday, everything retail goes down. It's a fact of life. And when I say everything, I mean everything. The reason? I think it is because of the commoditization by sector that's gone on in this market. Put simply, almost every big capitalization stock is part of an ETF, or exchange traded fund, and the "knee bone connected to the leg bone" process of the group effort overrides whatever else might be happening to the individual companies caught up in the selling dragnet.
So, let's take Macy's. Its disastrous shortfall and guidance cut reverberated throughout every part of the consumer spending cycle. Macy's sent down Home Depot (HD), even as Macy's problem has more to do with Amazon (AMZN) than with consumer spend. The reverberations obliterated the stock of Ulta Salon, Cosmetics and Fragrances (ULTA), as if women can somehow get to the Amazon beauty parlor instead of Ulta's. Irrational? It doesn't matter one bit. At least on Day One.
Same thing with the restaurants. They were all crushed by the weight of the shortfall, including the stock of McDonald's (MCD). Remember, the market doesn't distinguish why things went wrong. It just punishes the whole category.
On Day Two, though? We get the second look. Buyers rushed into the stock of Ulta as investors collectively realized what a mistake it was to homogenize and then crush everything. Ralph Lauren (RL) helped the cause by delivering a very good quarter when it comes to retail. Its wholesale division was just OK, but the fact that its mall stores fared OK was viewed a major positive that overrode the collateral damage of Macy's even as Kohl's (KSS) really stunk up the joint with a terrible miss. The good number from Lauren inspired buying in the beaten-down PVH (PVH) and Nike (NKE), both of which have been endlessly pummeled here.
Restaurants were helped by a shockingly better quarter from Jack in the Box (JACK), which had been pummeled for weeks after it gave terrible guidance last time around. It looks like the company had under-promised enough that when it finally reported a decent number buyers went nuts for the stock. How powerful was the pin action? Domino's (DPZ) and Yum! Brands (YUM) caught bids and Darden (DRI) swung back into the black. Oh, and of course McDonald's roared back into the black after one day in the penalty box.
The group was aided, ironically, by the fact that oil, which had been down, reversed intraday and finished nicely higher. Remember, we can't relate higher oil to the consumer at all because the big portfolio managers regard higher oil prices as a sign that the consumer is spending more. The market makes you suspend your rationality several times a day when it comes to oil, and you have to take it as gospel that even though higher gasoline is bad for the consumer it is somehow good for consumer-related stocks. In fact, the midday reversal in oil moved up almost the entire market, as it has done repeatedly in 2016.
How broad was the retail rally? It didn't take in everything, but it tried. For example, the stock of Home Depot tried to snap back. I think people are worried because it reports next week. But I bet it works its way higher through until the quarter is announced. Remember, this is planting season, the equivalent of Home Depot's Christmas holiday period, and, again you don't buy tomato plants through Amazon -- at least not yet. I like it into the quarter.
We had the same thing happen in technology. Yesterday was a hideous day for tech across the board as worries about enterprise- and cloud-spending slowdowns rolled through the entire sector.
Today, the sellers bore down just on the beleaguered Apple (AAPL), which is part of the Action Alerts PLUS portfolio, and those companies that sell parts into it. I don't think Apple can stop going down until the research firms who claim to love it start the downgrading. There are too analysts who profess love for Apple who wanted the stock to bounce so they could get off the buy train. It didn't happen, and now they are each trying to deal with the pain.
It is my experience that what will happen now is that some finally will break ranks and we will get the downgrades that accompany the bottom. It hasn't happened yet. If you don't own it, you might as well wait until they do.
Some stocks, though, just can't get out of their way and they can undo an entire sector. I can't believe how badly this Valeant (VRX) acts. We had incoming CEO Joe Papa on earlier this week and he explained how there was much to Valeant that the bears didn't realize, including lots of good drugs in the pipeline.
It hasn't mattered. The stock of Valeant is back to its old bad ways as an extremely negative article in The New York Times said the drug price gouging that Valeant admitted to hasn't been rolled back yet -- something that Papa promised would happen. At the same time, we keep hearing that the health care system is going to be shaken up by either presidential candidate, and that means that all drug prices might need to come down. When that story makes the rounds then you know that the biotechs are going to be punished, and they were all day.
So, what really was able to provide leadership? As is often the case these days, it's stocks that are the subject of takeover rumors. News stories about a possible bid for Monsanto (MON) from two different German companies ignited the chemical companies. Stories about possible food combinations surfaced as a major firm predicted that Kellogg (K) could be on the verge of a bid. When you consider how well the stock of Kraft Heinz (KHC), which also is part of the Action Alerts PLUS portfolio, has been acting since it reported, you can understand why other food companies may want to emulate that firm's tremendous appetite for takeovers.
Oh, and it wouldn't be a bright, shiny day without more buying in Amazon and Facebook (FB), the two stories in this market that are viewed as unassailably positive (the latter also is part of the Action Alerts PLUS portfolio). Sadly, though, for the rest of tech, these two are disrupters, not uniters, and they have no ability to take up anything but themselves.
So, after a hideous day yesterday where individual stocks managed to pull down whole groups in the equivalent of phantom multicar pile-ups, buyers -- aided by stronger oil prices -- returned to the scene of the accident and picked up the cars that weren't damaged and drove away with them. It's the pattern of 2016 writ large, and if you aren't used to it by now, then it's time you came to your senses as it, right now, is the only thing that makes any sense in a pretty irrational moment for the entire U.S. stock market.