Do you know why, after 15 years, I still like to play "Am I Diversified?" It's because of days like today, that's why.
Days like today are when we find out that stocks can trade in unison, it's just that we don't know which direction they will go in unison.
If you are just in a series of incredibly fast-growing high-tech stocks, you were slaughtered today. If you were in the down-and-out retailers and the cheap banks and any domestic transport company, like a rail or an airline, you thought today was fabulous.
Why not? Out of nowhere, we have a chance for tax reform, something that didn't seem possible a month ago. So all the stocks of companies with almost entirely domestic businesses are going to see their taxes fall and fall hard, and their earnings will go up concomitantly. However, with the exception of the big internationals that want to repatriate their earnings at a new lower tax rate, the tech companies don't really benefit from reform.
Therefore, without new money coming into the market, the stocks of companies that don't stand to benefit get sacrificed to raise money for the companies that do benefit. It's how whole groups of stocks like the retailers, which had fallen out of favor, can soar. It's how the bank stocks can zoom. It doesn't matter which ones. At moments like these, they all trade in unison until the rotation peters out and the individual characteristics of companies -- a bad Wells Fargo (WFC) investigation, a fabulous earnings report from a cloud company -- matter again. I swear, though, when you are in the midst of one of these rotations, it might not even matter if Macy's (M) comes out and says Black Friday was bad. It's going to trade with all the domestic retailers until the buying is done.
Why should we care so much about a dichotomous day where if you are in the in the big domestic Dow stocks you are thrilled, but if you are in the big Nasdaq stocks you are appalled? I'll tell you why. It's because of the pain. If you were in FANG and its derivative today, you got hurt so badly that I swear if we get this action in another couple of days and you were using margin to buy stocks -- actually borrowing money from a broker to play, and you are playing the ponies of the cloud -- you will be blown out, sent to kingdom come and you will never come back.
Before I go into what happened, let me tell you how I invented the most boring game in the world. We were coming out of the incredible dot-com explosion where people lost trillions of dollars and I realized that had you had a portfolio with a nice mix of consumer packaged-goods stocks like Coca-Cola (KO) or Procter (PG) , some inexpensive banks with good dividends, a transport and some old-fashioned -- not biotech -- but genuine big pharma like Johnson & Johnson (JNJ) , with a fabulous dividend and a solid balance sheet, you got hurt if you owned Cisco (CSCO) and Intel (INTC) and Qualcomm (QCOM) along with them. But you weren't crushed. You lived to play again and you were able to take advantage of the fabulous wealth creation that is the stock market.
It is why I always say your first investments should be in index funds, which give you built-in diversification. It's why I said don't buy all energy when oil was at $100 a barrel and why you didn't want to buy all food stocks when Kraft-Heinz (KHC) was on the prowl for big game in the supermarket aisles. And, of course, it's why I have had to de-emphasize retail, long one of my favorite sectors, because of the colossus, the death star that is Amazon (AMZN) .
I never cared whether "Am I Diversified?" is stultifying. I always know that days like today come and when they do those who are borrowing money to buy stocks, as if they are like homes you can live in, and are buying stocks they do not understand, their instincts are to sell tomorrow. They become carrion on the battlefield of stocks. I do not want the buzzards to get you. It's why I always say don't be greedy and nobody ever got hurt taking a profit.
I do a call once a month for Action Alerts PLUS and in a recent call I lamented that my discipline kept me from owning all of FANG. I just said that as fabulous as Facebook (FB) , Amazon, Netflix (NFLX) and Google now Alphabet GOOGL are, they will break your heart when the Nasdaq skips a beat, especially now that there are ETFs that mimic FANG. I was apologetic about it, self-effacing, but making it clear that it's days like today in which balance means so much. (Facebook and Alphabet are part of TheStreet's Action Alerts PLUS portfolio.)
So what's really going on underneath? First, there is the climate. Tech's gotten so red hot that it's scorching, particularly cloud- and semiconductor-based stocks. This morning a key stock in the cloud firmament, Autodesk (GOOGL) , a very good software maker, blew up with a real shortfall. At the same time, we got the speculative juices of bitcoin inflating whole sections of the market and making people feel that there's too much froth even if there is no exact correlation to stocks. You have forecasters, though, talking about how stocks are more expensive than they have ever been other than at tops. I heard it from three strategists last night at the launch party for the new Squawk Box digs.
Simultaneously, you have this incredible confluence of a Republican-induced tax program that is a windfall for companies with domestic earnings. So on the one hand, you have investors feeling frothy in light of bitcoin and Autodesk, and on the other hand you have down-and-out stocks that just got their earnings forecasts boosted, so tomorrow we will hear a host of upgrades for this group. Meanwhile, it doesn't matter at all what the analysts say about, say, Salesforce.com (CRM) , where nine of them raised their price targets this very morning and yet the stock still fell.
So what happens now? That's what you really want to know, right? Now it gets interesting as I take you behind the scenes of what's going on. Stocks are a little like camping, or glamping as the fancier millennials now call their RV trips. Imagine you are with four friends and a bear startles you and is clearly hungry for some human porridge. You know you don't have to outrun the bear, you just have to outrun the other campers.
That's what the sellers are like today. They want out so badly because they know that if they get out ahead of others they will do much better, especially because they feel compelled to buy the domestics now that they expect the analysts to come out of their foxholes and do some table-pounding on the Macy's and the JPMorgans (JPM) and they have no firepower beyond what they can raise by selling.
But these funds are, by nature, herd animals. They don't care if Amazon just had the best Cyber Monday ever. They don't want to know that Salesforce has nothing to do with Autodesk. They are simply going into their traders at their firms and saying, "Get me out of a million Facebook and get me out of it now." Normally, that's not a big deal. But when everyone wants to sell the hyperbolic Facebook, the traders on the other side, at the brokerages, have no desire to take down any inventory. They are dry cleaners; they don't want to keep your suits even if they are Brioni. So they can't finish selling the Facebook until tomorrow, usually by tomorrow afternoon. At the same time, the highly margined people have until tomorrow to raise the money to put up more money. They usually can't. That's why I always say you have to wait until the end of the second day of a selloff before you do much buying. It's why I told club members we are selling some of the extended banks and retailers we have to get a bit of a cash hoard coming if something strikes our fancy near the tag ends of selling tomorrow.
Is this a garden-variety selloff? Wrong question. Are there stocks of companies that appeal to you that are finally reaching your prices? That's what you are looking for. And when you find them, buy a little. But as is the case with all selloffs, leave room and expect to buy more the very next day.