For the last 5+ years I have been writing about how good news became bad news and bad news became good, due to the Ben Bernanke and the Federal Reserve's stimulus policies. What I mean by that is when we had bad news, it would mean that the economy was still weak and the Fed would stay accommodative and continue printing money. This caused the market to rise. On the flip side, when we had good news about the economy, the fear was that the Fed would cut back too early and stocks sold off.
This month marks a new era, the age of Janet Yellen. In this brave new world of the Fed Tapering, we are back to the good old fashioned way to monitor the economy and the market. Good news is good news again and vice versa, and that's why the increased volatility this year. All of a sudden all the good news switched to bad. It started with the employment numbers last week and continued through manufacturing and production.
One area that the Fed sees as a negative that I just love. The "official" inflation rate continues to remain below 2%. That scares the bejeesus out of the Fed because without stimulus we would be in full-fledged deflation. That is what will keep the Fed stimulating for as long as they want, because they have room to keep the printing presses going before they create enough inflation to become dangerous.
With an ugly January behind us, which we learned last week in often leads to a bad year, what we really need to know is what the rest of the year will bring. If we look back to 1950, the February through December period after a down January has led to a median gain of +1.3%: but still ending down for the entire year because the median January loss was -3.7%. I took it one step further and looked negative Januarys following a up year in secular bulls, I was pleasantly surprised to find out that 78% were positive, with a median gain was 4.5%.
Of course everyone is wondering whether this is the beginning of the next crash. I do not think so. To me it looks like the market is sending the Fed a message that they are worried about a declining economy and if the Fed will help and reverse the taper if necessary. I suspect that they will get that reassurance along with more positive economic numbers shortly.
You want to be leery when stocks go down on good news and likewise get bullish when stocks go up on bad news. Last week's rally on Friday from not so good employment numbers could mean that the correction we've been enduring since the beginning of the year is over.
I continue to suggest buying Apple (AAPL), which has come strongly off the bottom after getting hammered, 2 reasons: 1 is that it just signed a deal with China Mobile (CHL) to allow iPhones to be sold in China which won't show up on the bottom line for a while; and #2 that the 5S was not enough of an upgrade to lure in the iPhone 5 holders, but the next one will. They make sure of that by installing a battery that conveniently dies faster once a new phone is out.
Investors should also snap up the powerful growth names like Microsoft (MSFT) which is the staple for every computer made and Google (GOOG) which is leading the technology war and has something up its sleeves with its secret new building in San Francisco. Also look to buy selected social media companies like Twitter (TWTR) following its decent back to earth and still has expanding user base, Facebook (FB) is winning over the older crowd, the very people with money and will not be upset by their ads. You can also simply buy the market ETFs like QQQ and SPY. Avoid the metals like GLD, with the Fed on the path to less stimulus, gold will continue to get knocked around.