Take some time off. Sit on the bench. Let someone else play.
That's one of the defining moments of the final month of the year, at least of a good year like this one. And while it's playing out in what seems like a bewildering fashion, it is actually anything but.
So let me explain. Here's a primer about what you see on your screen.
For days on end this market's been led by the stocks of companies with very little economic sensitivity. We have seen tremendous leadership from PepsiCo (PEP), which has had a remarkable stealth run from the $70s, a move that picked up speed as the stock recently galloped from $90 to $100.
Procter & Gamble (PG), which had been in the $70s for ages, suddenly broke out and headed to $90, a fantastic run for a company in the midst of endless restructurings, this one offloading the slow-growing Duracell to Berkshire Hathaway (BRK.A, BRK.B) and the problematic Wella hair care business for perhaps as much as $7 billion. A boring stock had grown exciting again.
Oh and speaking of restructuring, Kimberly-Clark (KMB) spun off its terrific health care unit, Halyard Health (HYH), a stock I really want to revisit in 2015, and KMB just kept climbing without it.
Drugs? Bristol-Myers Squibb (BMY) vaulted 10 points out of nowhere. Animal health company Zoetis (ZTS) soared in anticipation of perhaps being the next target of hedge fund activist Bill Ackman, who loves to shake things up. In fact, his joint move with Valeant Pharmaceuticals (VRX) to take a run at Allergan (AGN) pretty much told the tale of this staple run, with Cramer-fave Allergan ultimately ending up in the clutches of another terrific stock, Actavis (ACT). Did Actavis overpay? All I can say is, if that's the case, I wish all my loved companies would overpay for something as it has gone to $265 from $216 pretty much on thought-to-be synergies alone. The whole notion of Allergan being undervalued by 150%, which is what it turned out to be vs. a year ago, and the potential for other combinations in the industry, drove all of these stocks higher.
Right along with them came the move in the biotechs. In the old days we used to see these stocks move in tandem with the fall conference season, as new drug formulations would be showcased. The market went away from that for some time until this year when the bull could no longer be denied. Next thing you know we saw four stocks just roar, "the four horsemen of the big pharma apocalypse" I named them, notably Biogen Idec (BIIB), Celgene (CELG), Gilead Sciences (GILD) and Regeneron Pharmaceuticals (REGN). They've been roaring forever, and Biogen's still rocking off of early data about a promising potential drug to arrest Alzheimer's disease, one of the holy grail illnesses that many pharmaceutical companies have tried, and mostly failed, to develop.
Now, rather suddenly, the flow of funds into these recession-proof stocks has started to reverse. This is day one of the changeover. Why is it happening? First, these stocks have had an unprecedented run based on a slowing worldwide economy -- these are big global companies -- and in the case of the packaged goods companies, a belief that earnings estimates are too low given the decline in one of their principal raw costs, namely petroleum and its derivatives, including plastics.
But that can only take you so far and these stocks have truly stretched the outer bounds of valuation.
In addition, though, true bull markets like this one do let starting players rest and recharge while investment managers put lagging benchwarmers into the game. Of course, they don't just appear by magic. There has to be some reason, some catalyst, no matter how obscure.
Let me give you the litany behind the move so you can better understand it. First, oil's bouncing. Do not overlook the fact that there is a substantial cohort of managers who simply believe that oil is the ultimate barometer of the industrial health of the world. This group of managers simply won't touch any companies that need strong economic growth to beat Wall Street earnings estimates and if oil's going down, there can't be any real economic growth. Hey it's not farfetched; we know the demand side's been weak. We heard it last night from Boone Pickens on Mad Money.
Second, we've been waiting for some positive data about the U.S. economy, something that shows there's an accelerating pulse. I know we are all conditioned to think that numbers that emanate from the government are the ones that can change people's minds about the direction of the economy. A strong gross domestic product number, say, or a strong employment report as some are expecting Friday, can create that impression.
However, the people who really focus on these cyclical stocks are driven more by obscure data that you would normally believe. I make a big deal, for example, of what Alcoa (AA) tells you about the economy during its conference call. Alcoa's erudite CEO, Klaus Kleinfeld, has taught me that I should pay attention to truck orders, that they are amazingly sensitive indicators of real economic demand. Sure enough this morning we learn that big truck orders have just surged back to levels not seen in eight years -- that's right, pre-recession levels. I know, sounds like a little thing, but it is anything but as truck orders tell you that everything from Joy Global (JOY) and Caterpillar (CAT) to Cummins (CMI) and Eaton (ETN) should be flying.
And they are.
That comes on top of the fantastic auto numbers we got yesterday. I can't overstate their importance given that the talk of the town among those who were buying those staples was that we had hit the peak of the auto cycle. Wrong! Anything auto related is just on fire.
Now we are getting a hugely important shift within technology stocks precisely because of a belief that things are getting better in the industrial world. We have seen a wholesale run on the superior-growing internet and social media stocks. Boy have they become dogs, at least for now as I don't want you writing them off. Every dog has its day.
The money is flowing into industrial techs Intel (INTC), Hewlett-Packard (HPQ), Micron Technology (MU) and a host of little semiconductor and big semiconductor equipment stocks. These are classically inexpensive stocks that need automotive and industrial company demand to rally. And we are getting it. Think about it like this. Notice the Cisco (CSCO) move? That's about a basic industrial tech signaling that 2015 could be a better year. We are seeing the same thing with Texas Instruments (TXN), with EMC (EMC) and with Avnet (AVT). These are terrific moves and we are very early on in them.
Now, I think it is important to point out that if we get a weak employment number on Friday it is entirely possible that we could roll back these gains. And if we start hearing a lot of "shut down the government" chatter out of the Republicans that will send money scurrying back to PepsiCo and Bristol-Myers.
However, if we get an employment number that is even halfway decent, we will see a gigantic inflow of money into stocks like Honeywell (HON) and 3M (MMM), all of which have been resting and should finally break out to keep pace with the staples.
Plus, I think that you can expect that aerospace and defense names, all of which have been creeping up, could be able to put up some huge gains -- think Boeing (BA), United Technologies (UTX) and Alcoa itself. That would be typical of the pattern I am used to seeing back in the old really bullish days.
Remember, my goal here isn't to tell you go buy the cyclicals or sell the staples. My goal is to show you what's underneath the hood, how the averages look like they are doing nothing, but underneath we have a rotation going on of immense proportions. I know it seems mystifying, but it's time honored and recognized by so many professionals that I had to share the skinny with you before you decide to drop or add players to your stock fantasy line-up as we enter the crucial last month of the season.