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Investors Playing Musical Chairs


Market leadership has been dwindling and investors are struggling while they search for a safe haven.

We've all played the game as kids. We listen to the music walking around in a circle with our eye on a chair and when the music stops we rush to sit down. Of course as the game goes on there are fewer and fewer chairs until all the participants are eliminated. It has become increasingly apparent that investors are playing this same game. With one foot out the door they have their eye on a go-to stock -- unfortunately the field keeps getting smaller. Market leadership has been dwindling and investors are struggling while they search for a safe haven.

As the recent turmoil ran its course chairs were disappearing one after another. First financials then cyclicals, retail and even oil stocks started to weaken. Then last week the final insult when John Chambers, the CEO of Cisco (CSCO) took the big cap tech chair away with his bearish outlook for the U.S. enterprise space. Strong cash flows, strong balance sheets and lots of exposure overseas weren't enough to hold these stocks up.

All day Friday traders tried to rally the market into positive territory and take some of the sting out of a brutal week. Unfortunately, late in the day the man behind the curtain decided it was too dangerous to carry exposure into the weekend as stocks sold off hard and closed near the lows.

Financials are trying to convince us they are done going down, as many gained ground in a decidedly negative tape. Is it real this time? We have seen this play out several times this year as financials stage an impressive rally only to be brutally beaten down as more bad news hits. We all know this trade will eventually work but being early has been very costly for those who felt the coast was clear.

What I find most disturbing is the leadership being offered by stocks like Proctor and Gamble (PG), Coca Cola (KO) and Pepsi (PEP). These are great companies to be sure but also a clear indication that investors are losing their appetite for risk. Is a recession far off? I'll leave that to the economists but market action is sure pointing in that direction.

On Thursday my firm made a decision to dramatically reduce exposure in some of its funds. In one my firm actually raised cash to 80%. Longs were sold and shorts were covered - why give back hard-earned gains? A tradable rally may be very near, especially given the oversold conditions and the approach of November options expiration. What isn't clear is which stocks will rally if and when it comes. Will it be the beaten down sectors like financials, retail and housing: all very dependent on the next rate cut? Maybe Uncle Ben will come to the rescue with a surprise move when we least expect it. Will the previous leadership, tech and basic materials, regain their footing?

They say confession is good for the soul and I confess my crystal ball is unclear at present. I have written time after time that hope is not an investment tool. I don't need clear skies to put capital at work but I have to at least be able to see the end of the runway before I take off.
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No positions in stocks mentioned.
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