Keep your friends close and your enemies closer. The sage advice that Michael Corleone learned from his father and repeated to Frankie Pentangeli in The Godfather Part II should be at the front of your mind on a down day in the markets. I cannot count how many times I have been asked about the markets in the past two weeks, and I have always responded with "well, it is October."
I believe this correction is real and will last at least through year-end. That is where the friends and enemies come in. You have to separate your portfolio into the names that you will hold in any market environment and those that you are willing to trade. You have to comprehend the very real possibility that your "friends" could get cheaper, much cheaper, over the next few weeks. If so, you can always buy them back at lower prices.
In terms of enemies, I listed four "garbage" stocks in my RM column last Thursday. I still believe Tesla (TSLA) , Twitter (TWTR) , Snap (SNAP) and T. Rowe Price (TROW) should be avoided at all costs. This is a market in which short-selling is once again a viable option, and though my client mandates prohibit me from doing that, I believe that list is a good place to start.
This pullback has been catalyzed by higher interest rates, and that means you have to understand consumer behavior. Other things equal it is now more expensive to buy a car and a house than it was a year ago, and thus you should be avoiding carmakers and homebuilders in this market. I have spent virtually all my adult life following car stocks around the globe, and let me tell you what I have learned from bitter experience: they can always get cheaper. Avoid Ford (F) and GM (GM) like the plague and don't be tempted by Fiat Chrysler (FCAU) , either.
Autos are a small part of the overall market, however, and the broad market's spectacular performance over the past two years has been driven by investors' belief that big-cap tech stocks are immune to any correction. The safe haven nature of the FAANGs is about to be tested, though.
Apple (AAPL) , Amazon (AMZN) and Netflix (NFLX) do not, for the most part, rely on providing financing to purchasers of their products, so their demand should not exhibit elasticity with rising interest rates. Facebook (FB) and Alphabet (GOOGL) are dealing mostly with corporates from a revenue generation standpoint, so higher interest rates should not materially impact results at those two companies, either.
But like Sonny Corleone at the tollbooth, this market is ready to annihilate stocks of companies that miss earnings. IBM (IBM) was an example this week, and the fact that the FAANGs (with the exception of Netflix, which easily exceeded expectations with its third quarter results) are so slow to report earnings means the answers still hang in the balance.
The remaining FAANG earnings report dates are as follows.
Apple: November 1
Alphabet: October 25th
Facebook: October 30th
Amazon: October 25th
So the week encompassing Thursday the 25th to Thursday the 1st is going to be extremely important for the markets. Between the VIX securities I have been buying (see my RM column from last Friday for details) and my avoidance of FAANG, my firm's results have started to once again outperform the markets after a very difficult first nine months. To cap off the year with relative outperformance, however, I will need at least half (and preferably all) of the yet-to-report large-cap tech companies to spit the bit on earnings.
I think it's time to think like a Sicilian about the markets and trust no one--or at least no big cap tech stocks--and in tomorrow's column I'll preview earnings for Facebook, Apple, Alphabet and Amazon from the perspective of "what could go wrong."