Initially, there are always too many variables. It overwhelms you.
In situations like this, everything financial does seem to confuse, and the haze makes for a lot of wrong decisions.
That's why I like to take it outside the realm of stocks and devolve to the world of sports -- simply because it will make things a little clearer. But I am well aware that I am offering an agenda that has to do with money, not lives, and for that I regret, but you don't come to me for solace, you come to me for financial help.
So, let's play some financial football. You are the quarterback. Your opponent orders an all out UNEXPECTED blitz and you are definitively not ready for it after a 30% rally and a level of confidence as marked, or marred, by an overbought market with much more greed -- 97% on the CNN Index -- than fear.
That is the initial premise, correct? Who could have foreseen this kind of blitz, one triggered by the killing of a general whose strength is orchestrating terrorism, but is somehow loved by all in Iran and, seemingly, Iraq.
An unpopular president in the media is then greeted with a plethora of stories about what a mistake it was because it awoke the sleeping giant that is the all-powerful Iran and the giant will not be put to sleep easily.
Even a president that the mainstream media loved, such as President Obama, might have taken some hits on this one. Remember, the mainstream media actually believes that Iraq is an independent state, not a client state of Iran, which it most surely has become. Unless Trump wants to establish a Sunni regime in Iraq -- something we overthrew to put this government in -- he's stuck with escalating if Iran does anything at all, and it's all but guaranteed such a domestically popular response.
Now back to the blitz. We have to assume that, initially they get to the quarterback, which is, well, you.
The selling levels indicate a sack.
You could throw the ball away, which, to me, is the equivalent of doing nothing. It's going to cost you a down, and that means a couple of percentage points of loss, not much more. I think that's what most people with a diversified portfolio would do.
With the wrong portfolio, though, an undiversified portfolio with no cash, the pressure will be worse. No chance to throw the ball away and a loss of 7%-8% if the unexpected keeps occurring and an escalation is all but certain.
I wish I could help in that case, but it's the opposite of what I advise or am doing with Action Alerts Plus, so I can't help you. The hit will be taken.
But if you have cash, if you are opportunistic, here are the variables.
We could see continued fear in the market as represented by the rise in bonds and collapse in yields. That's the flight-to-quality trade. It's also being accompanied by a decline in the dollar. It's a rare combination, but one that offers any quarterback options.
I don't think those options are being hit badly by a small increase in oil, because the longer-term price of oil is virtually unchanged. If these events were to lead to something huge for oil, it would be the opposite. I trust the curve -- meaning the forward market for oil, which remains in the low $50s.
Why are there even positive options at all for stocks?
The S&P futures, that's why.
They take down every stock at first. Everyone, not just the companies with stocks that deserve to be hit, namely those that require their customers to take risks and buy something. Those "receivers" are going to be well-covered, leaving you vulnerable to an obvious interception.
Remember, futures are an UNNATURAL bundle of random stocks, even as the creators of them regard all stocks as equal. The proselytizers of these products create tremendous opportunity because their dogma doesn't allow for individual stock thinking. It's too risky for them.
It should not be too risky for you.
So, as all stocks go down, a good quarterback understands that some of his receivers will not be covered -- namely, those with good yields and not a lot of economic exposure.
Those are the stocks you should be looking for with your cash.
Again, if you are totally loaded down with stock, all you can do is try to reposition on the fly, which is often too hard to do. You will have to lose money to do so.
But if you have the cash, there are several receivers worth throwing to.
You could go for the utilities, but they might not even be down.
You could go for gold, but they will be up.
You could go for defense, but you have to remember that they were up on Friday and people might be taking profits. I will have more on that option later today.
Or you could do what I think will work not just for today but for the ensuing weeks we are headed into: earnings.
Let's do it with a Socratic method. What companies do not have much economic sensitivity but have yields that are often well in excess of Treasuries and are huge and therefore disproportionally beaten up by the futures?
1. The drug companies.
2. Some of the food companies.
3. The staples.
Those are the open receivers. They are the ones with price-to-earnings multiples that have nothing to do with these events.
I think the literally obvious one is the company that just anniversaried the announcement of the purchase of Celgene: none other than Bristol-Myers Squibb (BMY) . None other because, as I say all of the time, "What does the ___ (fill in the event) have to do with the price-to-earnings ratio of Bristol-Myers?"
The answer is nothing, but the futures sellers don't care that they are selling stocks that have no economic sensitivity with those that do, because all stocks are considered risk assets.
I always find that logic amusing, because consider where stocks have come from since 1981 or, again, since 2009, despite far more risk than we might be facing -- unless you think that a war with Iran will lead to Armageddon. I can't help you then.
All of these I believe will do fine in earnings season, which, again, beckons.
What won't do well?
1. There are few natural buyers of the financials with credit risk in this environment, they may be the most vulnerable.
2. Retail tends to get hit. There you have to buy WATCH -- Walmart (WMT) , Amazon (AMZN) , Target (TGT) , Costco (COST) , or Home Depot (HD) -- when the decline shows some sign of slowing. We are not in that moment.
This is only day two of the selloff, which is reserved for buying only the Bristol Myers types. People will be selling retail like mad, because that's always been the Pavlov's Dog response to an uncertain environment with gasoline price risk. Same goes for the restaurants. Go try buying McDonald's (MCD) . You are on your own. I would be a seller of that one to buy Bristol-Myers.
I wish there were more to this, but even with a total wild card president and a zealot wild card country like Iran, it has to be the usual correction playbook and no more.
Remember, this is day two of the selloff, we are very overbought and have to expect losses. My playbook only works with some cash and even then the buying has to be spartan, simply because there will be so many people who have to raise cash to avoid big losses.
They are your fellow shareholders. They are the futures sellers. They are the blitzers.
So, get ready to take some hits, you can throw the ball away and do nothing, knowing that a few weeks or months from now we could see a resolution.
Or you can look to be opportunistic as I outlined.
Why am I not more fearful?
First, scared's a lousy way to play.
Second, though, what does a warlike footing mean for the economy? Historically, it's been good for economic stocks, not bad. Just not yet!
Third, a war favors stability in the White House. Hate him or like him, Trump's base will most likely think that the killing of a terrorist leader is a good thing REGARDLESS of the consequences. But it has an impact on the Democrats, too, Presumably the Democrats will want tried and true, which means Joe Biden. A Biden versus Trump election is the one that is the best for the stock market, of that there can be no doubt, because it eliminates the real wild cards: the anti-wealth/anti-stock market candidates.
So, circling back, an unexpected blitz will most likely cause you to take some hits, but, if you have cash and you are still standing, you should now know what to do and not to do -- just like always when we are overbought with way too much complacency after a 30% increase in stock prices from a more halcyon time.