Last night I spent some time exploring the Twitterverse. As always, I exchanged barbs and quips with fellow Real Money contributors Brian Sozzi, Bob Byrne and others over the course of the evening. I also noticed a very strong trend: Market participants are either hard core bulls or hard core bears right now. Everyone seems to have a high degree of conviction about what the market is going to do over the next few months and is willing to bet on it. They also seem to think the rest of us should follow their path with high degrees of conviction and leverage.
This type of thinking is insane right now. There are just too many variables to merit taking a strong stance on market direction. To be fair, the negatives outweigh the positives at this moment. The fiscal cliff is looming. Europe is still, as my kids like to say, a hot mess. Earnings so far have been weak and guidance is worse for many of the S&P 500 companies. QE3 has not accomplished anything more than QE2 did -- probably a lot less. We are seeing layoffs rise, especially in the retail, restaurant and banking industries. To top it all off, we have increased geopolitical risk in the Middle East with chances for a more serious conflict rising by the day.
Given all that, we should sell or go short, right? That might work, but it could also be the trade that gets you carried out of the arena on your shield. This is a very nervous market and there are a lot of hedge funds out there that still need to make numbers for the year. If we get a hint of deal between President Obama and Congress on fiscal issues, the market could get a good old-fashioned, rip-your-face off rally. The same could result from any news that can be viewed positively coming from Europe. If the path of least resistance should begin to point up, shorts will get scorched.
It's time for a quick reality check. For all the nervousness in the stock market the past few weeks, it is only down about 7% off the Sept. 14 yearly high of 1474. To have a 10% pullback, it has to hit 1326 and it isn't there yet. Led down by the battered tech names, the Nasdaq is a little closer, as it has to get to 287 from the current 2895 to reach the 10% mark. That is not yet worthy of all the discussion I am seeing.
The real tell for me right now is that we are not creating a lot of new safe and cheap inventory. The screens are not showing a lot of new names worth buying. There have been some decent scale-buying opportunities in stocks such as Corning (GLW) and Nabors (NBR), but I am not seeing any of the former market leaders sell at discounts to earning potential or asset value. All we have here is a fairly orderly pullback form the highs. To this point the fiscal cliff is not a major inventory creation event.
If you take the recent decline as a payable event and pile into the market leading stocks and any of the negative events take center stage you could easily get buried. Trying to bottom fish stock with 20 PE multiples trading at 3x book value is betting not investing. If you decide the world is ending and sell everything, you will miss any compromise rally or find that someone else saw the same safe and cheap condition you did originally and miss a takeover.
Right now, the best thing to do is nothing. Make sure the stocks your own are still safe and cheap and you would be willing to scale into more on a deeper decline. Consider selling those that no longer are. The sit back and relax until the market makes up its mind which way it is going to go. Put yourself into a position to react to what the market actually does instead of exposing yourself to heavy losses by trying to predict. If you are an investor, then act like one. Do not give into the urge to cross the line and become an uniformed trader who serves as fodder for the machines.