When you wait for a pullback and you get one, it is vital for you to understand how far we have gone since you started waiting and how reversible the reasons for the fall might be.
Today's pullback's a tough one because we have been relatively straight up from when so many wanted a pullback that it's hard to say "you know what, this is the place I want to buy," without any of the new facts changing. After this kind of run it seems totally arbitrary that this level might be where you should start buying.
In fact we actually did some selling today for my charitable trust and told members of the Action Alerts PLUS club that we are way, way above where we wanted to buy stocks but didn't get a chance to, so there is no reason to break discipline.
Or to put it another way, this is day one of a retreat that is actually grounded in legitimate reasons to sell so you should be in no hurry to put new money to work or commit more to your 401k right now. If it goes right back up, that's fine. You missed the move. That's the cost of discipline. If it goes lower still, you will have some dry powder to work with.
That's always a good risk reward after only day one of a selloff after the kind of prolonged run that we have just had. I almost never buy on the first day of a selloff precisely for that asymmetrical thinking of missing an opportunity to make money versus getting creamed.
But let's deal with the root causes of the selloff so we know why its perfectly reasonable to hold out for what I can only regard as safer levels.
First, I would say that this rally has been half hope for a trade deal with China and half hope that Jay Powell didn't mean it when he said our rates were far from normal and he needed to tighten once in December and three more times, or even more, to cool off this economy.
The bulls got the latter half -- the rate hike pause -- and that was plenty enough reason to rally. But to continue the rally we needed a trade deal ahead of the March 1 hike in tariffs. Today we learned that from White House sources that the president is unlikely to meet with President Xi of China before that deadline, effectively kyboshing a deal and sending the market tumbling.
I have been saying over and over again that the real powers in trade are Peter Navarro, the president's Director of Trade and Manufacturing Policy, and Robert Lighthizer, our nation's trade representative, and NOT Chief Economic Advisor Larry Kudlow or Secretary of Treasury Steve Mnuchin,
Of the two, Navarro's the toughest. I didn't say he isn't willing to compromise. I am saying that you should consider the second part of his title, "manufacturing policy." Navarro's policy includes the concept that any deal is not about trade it's about stopping the Chinese from stealing our technology and using it against us in every forum from the factory to the military.
I had the privilege to be a judge on the President's old show, The Apprentice, and you need to consider Navarro and Lighthizer as one team, and Mnuchin and Kudlow as the other, and trust me when I say that when push comes to shove in that board room the Navarro led team wins the crown. After all, doesn't the base hate the PRC because it wiped out so many jobs?
However, if the market craters, you need to consider that like the president's Nielsens, and he will course correct and move closer to the Kudlow-Mnuchin camp. The show must go on!
Now, there's a dance that's been going on that the media keeps falling for the leaks from the Kudlow-Mnuchin camp not to worry, we will get a deal. Given that fact that I have been from the Navarro wing for the last 20 years, I can say that it is worth worrying about. Think about it like this. After today's leak, if Xi has to ask for a meeting, a big win for Trump. But Xi's thinking he can wait out Trump now that he sees that the Democrats aren't going to give him any trade deal that they have to approve. So it might be more of a standoff.
You would normally be able to buy stocks that are coming down hard, but we know that the same ones that are coming down hard, whether they be the technology, aerospace or industrials have the most to lose from no trade deal. Sure their earnings tended to be very strong, but the future looms darker than the past without a deal.
Could there still be one? I didn't say that Peter Navarro was intransigent. I am saying he's going to hold out for a real change in China, one where they change their ways, because Peter recognizes that if the Chinese keep up their tactics, we will be eclipsed as a great power. Those are higher stakes than the price of Boeing's (BA) stock or how many soy beans farmers sell. Maybe the Chinese, sensing restive Democrats in the House, are playing harder ball, too.
Second reason why the selloff has some gravitas? Earnings. We have had a pretty darned good earnings season. But some days just don't come together. Today was one of those days. Examples? First, the social media stocks post Facebook's (FB) redemption and Snap's (SNAP) miraculous comeback, have been the red hot place to be. But Twitter (TWTR) , while reporting a terrific quarter today, gave a forecast that was perceived as negative, slowing revenues and rising expenses. I think that's an unfair characterization. But it could not be dispelled.
We have had some excellent returns from apparel, including Capri (CPRI) , the old Michael Kors, just yesterday. Today we got numbers from Tapestry (TPR) , the old Coach, and they were very disappointing by their own admission, especially the numbers from the Kate Spade handbag division.
We've seen some decent consumer packaged goods company numbers of late but not Kellogg (K) which talked about a slowing breakfast business. Hain Celestial (HAIN) disappointed again, too. But what else is new from that natural and organic serial disappointed. Cereal and serial, just perfect.
Delivery's the rage. In fact, YUM! (YUM) , which reported a decent quarter today has a deal with GrubHub (GRUB) , the big delivery company. But the competition in the delivery business is furious and today GrubHub gave you a forecast that simply wasn't up to snuff.
Cyber security's been red hot but not FireEye (FEYE) which gave you a bleaker outlook that shocked people. My head was shaking after that one.
Third reason for weakness? The pathetic state of the eurozone where growth forecasts keep getting cut. We got another one today.
Tell you the truth I might not even have minded but the European news causes oil to tumble and the Chinese news aggravated the decline. You know how I feel about oil. All you need to know about the direction of the market sometimes is the direction of oil which leads stocks by the nose. When oil dropped more than a dollar you know the bulls were in for a beatdown. Given that oil is at the top of the range, you might get another bushwhack tomorrow.
Fourth reason? Sentiment. A poll of newsletter writers shows the most bulls in ages. The Standard & Poor's oscillator I pay for was dramatically overbought again. Anything north of plus five demonstrates too much enthusiasm. We are almost at 8.
Nonetheless, we have to own that it was a bad day for the bulls and that it's perfectly realistic to expect a few more until the facts get more positive and it isn't worth launching new money at the market if it doesn't.