Guilty until proven innocent. That's today's theme and it resonates throughout industry groups and sectors everywhere I look. Of course, you can choose to examine the overall market, or you can get your hands dirty and go case by case, but the presumption at the moment is that you may own shares in a company that is either guilty or will be found guilt by association.
Let's rip down the list. Right now there are tons of drug companies with lifesaving compounds that could be worth fortunes to those companies. But today a bipartisan Senate panel announced it's going to examine skyrocketing pricing of drugs and wants to grill Valeant (VRX), the poster boy of higher prices, and Turing, a company that put through an astronomical price increase for an old drug, to find out what the heck is going on. At the same time, some Democratic members of the House of Representatives want to examine the exact same thing, again triggered by some gigantic price increases by the same two companies.
So what happens? Investors who own shares in other companies with pricey drugs, like the biotechs or Allergan (AGN), get scared and dump the shares of the companies regardless of whether they are doing well or not. I have Allergan CEO Brent Saunders on Mad Money tonight and I can tell you it put up extraordinary earnings, so extraordinary that I am sure some investors are saying, "Uh oh, I got to get out of this one before we discover that it's raising prices too fast." (Allergan is part of TheStreet's Action Alerts PLUS portfolio.)
We saw a similar raid on biotechs on Sept. 21 when Hillary Clinton tweeted about price gouging. It lasted for a week and it made a ton of sense to sell all of pharma when she started making noise on the issue, and then buy them back a week later. In the end, all of the drug companies were found guilty by the market and losses were huge for those who waited to sell.
But here's the tough thing. Most pharmaceutical companies do not gouge. Most are responsible and put through increases incrementally when they can do so. That means when the hysteria dies down you have to get right back in. Or you can stick with old pharma that's not known for gouging, like a Johnson & Johnson (JNJ) or a Bristol-Myers (BMY). However, if the drumbeat has legs, you might even regret that decision because in this market, everything's guilty in a sector until proven innocent because they are, alas, all linked either by mindset or by some ETF.
Same with media. Last night, CBS (CBS) reported and CEO Les Moonves told a terrific tale about rising ad rates and the benefits of big hit shows and live sports programming, particularly the NFL. The whole group traded up on his comments. Then midmorning, Time Warner (TWX) lowered its earnings growth for next year in part because of weakness in cable programming. It doesn't matter that CBS isn't seeing anything like that. Time Warner, which doesn't have much watched in real-time programming, took everything down and caused CBS to reverse itself. Who knows what will happen tomorrow when Disney (DIS) reports? It's got plenty of live programming, but it is expensive. It also has plenty of programming that looks like Time Warner's cable offerings. It's got theme parks and movies, but it got slammed today as if it were guilty of being Time Warner. That's the guilt-by-association thesis writ large.
There are some winners and some losers among the restaurant companies. But on days like today, when a consistent company like Papa John's (PZZA) reports a weak quarter, you want to stick around with this group? It took a lot of courage to stay in Wendy's (WEN), which reported a very nice quarter this morning, but it was a lot easier just to dump the good with the bad, as we saw big sellers materialize in Domino's Pizza (DPZ) and Yum! Brands (YUM), the owner of Pizza Hut. I like both but it was easy to see why people could want to sell.
Same with the oils. Jeez, both the majors and the independents have been so strong as we realize that the world isn't over and oil can rally. But today oil falls back a buck and a half and it doesn't matter who is strong or weak. It's like the whole move has come to an end and all you want to do is beat everyone else out the door. I had debated taking some profits for my charitable trust in the oil group this very morning, but by the time I had worked my way through what I thought might be worth selling, others hit the bids and skedaddled, making the choice too hard. You had to sell them yesterday when they were ripping.
In this environment, all you can think of is which rally is about to be repealed next. Which group will be found guilty and get no reprieve? For example, it's the beginning of November and I worked outside for much of the afternoon. Why? Because it was 70 degrees and sunny. Who wants to own a retailer that has put in its winter clothing line in that environment? You want some Macy's (M), which needs it as cold as possible? You feel good in Nordstrom (JWN)? How about Penney (JCP)? I know I wouldn't. If I want retail, I will go for the inventory-less Amazon (AMZN), which sits pretty no matter how sunny or rainy it is. (Amazon is part of TheStreet's Growth Seeker portfolio.)
I know the industrials have been terrific, fantastic since the bottom in China in the last week of August. But are we tiptoeing past the graveyard as the freaking strong dollar comes roaring back to life to cripple next quarter's earnings? What do we do with the tech stocks knowing that strong dollar causes estimates to be slashed? Do we hope that nobody cares anymore? Or is it a case where they don't care until they do?
Of course, there are always situations where companies are pronounced innocent on the basis of a single piece of data. The bank stocks keep catching buyers because interest rates are quietly going higher and there's a sense that the world is a better place. The Chinese consumer has stirred. Europe seems stronger. Emerging markets have been creeping up. Car and home sales in this country are staying strong. We might get an employment number on Friday that shows growth, which will set us up nicely for a rate hike in December. If that's the case, these stocks go a lot higher.
We know that video games are incredibly strong and we are on the eve of a big analyst meeting for the acquisitive Activision Blizzard (ATVI), which just bought King Digital (KING) for what might turn out to be a song. Plus Electronic Arts (EA) put up a great number the other day. Take Two's (TTWO) been screaming. So let's go buy some GameStop (GME), which could roar here.
But for the most part on a day like today, the game of guilty until proven innocent is more powerful than any positive trend out there. And when the guilt comes on, it is never just for a day. That means you can expect more selling in drugs, in entertainment, in oil and in restaurants. Which is why if you are a trader you have to join the fray.
But if you are an investor? Don't play the uptrend that's running. Play the downtrend that's running out of steam. Which means wait three to five more days and pick up what's getting crushed. By that point, all the innocents will be pummeled and you can buy the cheapest, the best of breed for less than what they are worth, provided you accept that there could always be a day or two of recidivism before a bottom can be reached.