Where did the buyers come from? Where did the sellers go? That's how I feel on days like today when I see stocks that were trashed with abandon just a week ago and are now rallying hard.
You have to wonder whether the market is truly irrational on any given day, because, for the most part, there was never anything wrong with what was sold and never anything so great with what was bought.
Let's start with what was thrown away -- using some hardcore examples that make it clear how the market can be wrong on any given session.
First, we saw a rotation out of technology stocks that often made no sense.
Let's start with Salesforce.com (CRM) . Back in September, the stock of Salesforce.com stood at $92. It then roared to $108 into the company's earnings. The company then reported superb earnings, I mean really stupendous, and it got bushwhacked and fell to $100 as part of a rotation out of fast-growing companies that wouldn't benefit from the change in taxes as much as many domestic companies that would see their taxes cut dramatically.
Now, like many other technology companies' stocks, it is starting to climb back to where it was. Why is that? Simple, because no matter what kind of rotation we have, the growth-stock buyers can never resist high growth, especially when we know a company just reported, like was the case with Salesforce.
Initially, the hedge funds who are in stocks like salesforce use ETFs containing high-growth stocks to bang them down and move into ETFs that benefit from the code. Simultaneously, cash-strained funds sell some Salesforce.com to buy a 36% percent tax payer, knowing that it will soon have a lot more money in its coffers.
Then classic growth buyers make their judgment. They look at revenue growth, not so much bottom line growth, and they say "Salesforce sure does look cheap versus how it has been," and they start buying.
Now were the sellers wrong? They were traders who did what they thought was right. But the fact is that they probably didn't know what they owned, or they didn't care, because they are using an ETF to get out or short these stocks.
However, the upshot of what occurred is that the stock's decline colored the commentary about it. Soon, we began to hear that perhaps Salesforce didn't have the robust growth the bulls contended. If it didn't, the stock would not have been down. That's a wrong judgment.
Just because a stock goes down, that does not make the sellers smart. It does make you wonder if they know something you don't. For me, this is especially tough. I had just spent several days with the company as part of Dreamforce, the educational fest thrown by Salesforce.com, and I know enough about the company and its CEO, Marc Benioff, to make a judgment about its strength or weakness.
I stuck by it. I looked wrong to do so. But I had done more homework than the sellers and I could handle the stock's vicissitudes.
Same goes with Facebook (FB) , Amazon.com Inc (AMZN) , Netflix (NFLX) and Alphabet (GOOGL) . Facebook dropped 11 points in a couple of days, Amazon plummeted 62 points, Netflix shed 14 points and Google had a 61-point loss.
What happened when this decline occurred? We heard that FANG was dead. Why did we hear this? Because the stocks went down. How were the companies doing? We heard in this period that Facebook's growth had been strong, that Amazon had a fabulous Black Friday and a beast of a Cyber Monday. Google put out some new numbers that demonstrated how robust YouTube was, while making a strong case that its cloud division might be its best grower.
These all occurred while the stocks were falling and commentators weren't just questioning if the FANGs were done, they were determined to declare it dead, because the stocks were rolling over. I learned a long time ago that if you just take your cue from the stocks in a vacuum, or without the full panoply of knowledge about reports in context, you will be wrong. These stocks are all flying high now as people rethink the good news and its impact on the stocks themselves.
It happens all of the time. Yesterday, Home Depot's (HD) stock was down almost five points before its analyst meeting. I went through the comments and the presentation and discussed the findings with management blind to the stock. I just chose not to watch it. I concluded that the stock should be up two bucks, not down five bucks, but the fact that it WAS down made the negativity self-fulfilling even after there was none. How do I know this? Because I do an awful lot on Home Depot going as far back as the 1980s and I have conviction in my homework. The sellers? Not so much.
In the meantime, the market is beginning to re-evaluate what it bid up. I saw TJX Cos (TJX) , formerly an actionalertsplus.com name, be bid up to $77 on the positive aura from tax reform. Now it is back to $73 -- where it should be, given its disappointing quarter.
What other stocks can rally now that we realize that the first moves after news were most likely wrong? Last week VMWare (VMW) reported right in the midst of the tech selloff. The quarter was a thing of beauty. VMWare is integral to the adoption of the cloud, which is still in its infancy, and its business is on fire.
But it happened to report on a day where many seemed to, all of a sudden, question the growth of the cloud. That questioning is incorrect, something you can tell from listening the people who build data centers and know how short the supply is for them versus the demand. VMWare's stock is too low.
Finally there is Broadcom (AVGO) . Last night, this company reported earnings, and they were sharply better than expected. It boosted its already large dividend by 72%. It guided much higher -- in part because a large customer was ordering like mad. The large customer is Apple (AAPL) , although Apple's rules say you can't mention them.
So what happens? Initially, Broadcom's stock soared. But then sellers came in and knocked it down. Further a report from a smaller firm about how Apple's X may not be selling well trumped the terrific news out of Broadcom.
I think the initial soaring was right, given the 72% boost in the dividend and a remarkable guide-up. More important, I think that Apple's stock should have reacted strongly to this good news. I believe it will.
Finally, a word on retail. This morning Laurent Potdevin, the CEO of Lululemon (LULU) , talked about an incredibly strong holiday season. One of the issues that stuck out? That the recently opened New York store is doing incredibly well. Tourists are flocking to it.
Now think about something Macy's (M) has been saying over and over again: Its flagship Manhattan store has been hurt by a lack of tourism because of the strong dollar. Well, now the dollar's gotten weaker and we have Laurent telling us that visitors are back. I have been flogging this Macy's horse ever since Manny Chirico, the CEO of PVH Corp (PVH) , told us that this may be the best holiday season in four years. That was the last time Macy's had big numbers -- and Macy's is a monster seller of PVH's Tommy Hillfiger and Calvin Klein.
The turn for New York might be here. Macy's stock can still be bought.
My takeaway: The stocks often don't tell the truth. They are often wrong. Just beware of the rationalization that comes after a decline. The sellers may be using ETFs. They may simple not know what they are doing. Yet, we always think they have to be right and we all have a tendency to say that the sellers know something they don't. Trust me when I say that they can be clueless and if you blindly follow them in the face of good news, you will most likely be wrong.