Buy winners and sell losers? That's pretty much the thought behind today's action. The problem is there are a heck of a lot more losers than winners and we have to put that into context because it is highly unusual to see such behavior at this time of year.
What's behind this dramatic decline and how can it be stopped? What would make this market bottom? I have five things that must occur before we do.
First, the stock of Apple (AAPL) , the largest capitalization in the world, needs to stop going down.
It's a tall order. We keep getting new negatives that frustrate buyers. First, we heard on the earnings call that the company will no longer be giving out numbers of how many phones it has sold. Then we learned of large Apple order cutbacks including two that we can infer, Skyworks Solutions (SWKS) last week and then today Lumentum (LITE) . Skyworks is integral to the nuts and bolts of cellphone signals, Lumentum is about facial recognition. After today there is no denying that Apple has a problem. Is it China? Is it the developing world? Is it a slowdown here? We don't know. Maybe it's nothing.
The question is what's the solution. I would say the answer is price, when the service revenue plus the overall love for the phone cause buyers to come in. Judging by the ferocity of the decline we aren't there yet.
Second, the rest of FANG has to find its footing. These stocks, which had represented so much of the market's strength are not at the epicenter of the market's weakness. Facebook (FB) may actually be doing okay but its got the taint from its rapacious actions and they have to be put past them. I used to harp on them to bring in someone from the outside to help clean up the mess. They aren't going to do it. I am right. They are wrong.
Amazon (AMZN) has done nothing wrong. I think its business is doing very well. But they gave you a downbeat forecast and it kyboshed everything. I think it stabilizes first.
Netflix (NFLX) is hard because the idea of basing the stock price on the growth of subscriptions seems to have disappeared. It has to go still lower before it seems to matter again.
Alphabet (GOOGL) is the biggest conundrum. Its stock is inexpensive. They have more than $100 billion in cash. They own search. They own on-line video. They own the self-driving car market, at least for now. It's a buy. But no one cares. They will at a certain price though and I think people are too negative on this one in particular.
Third, we need Fed Chairman Jerome Powell to admit that he is winning the war against inflation when he does the next rate hike - which we need - and to say that now it is time to wait and see what happens. He needs to say that he doesn't want to be the reason why we are thrown into a recession.
He does NOT need to say rate hikes are off the table. He does need to say he sees concrete evidence that he is winning.
What would that be? How about the fact that oil is plummeting and that's been a source of persistent inflation of late? How about the fact that many materials are declining in price pretty precipitously? How about the fact that home sales and the prices for homes are now starting to go down because mortgage rates are at 5% so few homeowners with mortgages that had been refinances at, say 4%, can afford to move up, especially in places where the state and local taxes aren't deductible. Don't forget what Mr. Powell perceives his job to be: to slow the economy so wages stop going higher. I think that's absurd. What's the matter with the rank and file making a little more after years of not being able to keep up with expenses, especially health care?
Fourth, we need something good to happen with our Chinese policy, some sign that the Chinese will cooperate because they recognize that they have been cheating on us and have made very few reforms since the country became a member of the World Trade Organization. The idea behind the country's admittance was that it would begin to liberalize its economy and democratize its institutions. It has done none of that. If you haven't read the speech by Vice President Pence given at the beginning of October than you don't realize this isn't a trade dispute, it is a cold war with U.S. asking for the equivalent of regime change which is highly unlikely.
Still I don't want to rule out something good occurring at the G-20 meeting at the end of the month. Why? Because I think China is slowing faster than people realize and it's going to hurt them more than it will hurt us if the new tariffs go into place next year. That's because many of our companies are frantically trying to move their orders to Cambodia, Thailand, and Vietnam. It's a huge drain on the Chinese economy and it's not stopping, it's accelerating.
Fifth, the dollar has to stop going higher. Stock traders and investors live by the earnings estimates and the strong dollar, which continues to accelerate versus pretty much every currency, seems unstoppable. That means, despite the raw energy costs, the earnings estimates for next year are too high. It's a real headwind.
Sixth, the flight to quality has to end. Right now almost every consumer packaged goods stock, stocks like Mondelez (MDLZ) or Procter & Gamble (PG) or Kimberly-Clark (KMB) and PepsiCo (PEP) keep rallying. That's just a bad sign. Same with the drug stocks which keep hitting new highs. That's just investors and traders alike hiding in stocks of companies that may or may not even be doing well.
Finally, GE (GE) has to find a bottom. This morning my colleague David Faber pulled up with Larry Culp, the CEO, and talked about how the company can turn around. All I heard was that it will take a long time. If that's the case why own it? Worse, why not sell it?
I know, tall order. But some, if not all of these has to occur before we can find a bottom. Everything else is just a phony false floor not to be trusted.
(Apple, Facebook, Amazon and Alphabet are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AAPL, FB, AMZN or GOOGL? Learn more now.)
