How different kinds of investors can approach this August market pullback
The Nasdaq is rolling over, duh. The oils are headed higher. No kidding. So, let's sell tech and buy oils. Solid idea? Everything else, except, perhaps a handful of industrials, as well as Walmart (WMT), which reports this week, and Club name Costco (COST), which reports next month. And, the defensives are almost as toxic as the artificial intelligence-infused techs. That's really where we are, isn't it? It's like the whole stock market changed without anything changing. We are still gaga over everything AI. We are still leery over oil and gas. We keep talking about nearing the end of the Federal Reserve tightening cycle. We know inflation is cooling. But, since this dreaded month began, we have stopped believing in anything to buy except oil and we truly feel that to own Nvidia (NVDA) means you are as dumb as a bag of hammers. How could you have not sold Nvidia? That's what I keep hearing. Why are you holding that dog, I am being asked, without even a sense of sad history that my late dog Everest was re-christened Nvidia during what now amounts to the heyday of the company's incredible arc. What's the truth here? Did the fundamentals change and we didn't observe it? Or are the stocks that are now hated going to turn out to be precursors of the next downturn? Here's what I think's going on right now, and it's neither exceptional nor Earth-shaking. There are simply competing camps for your dollars and some camps, like those with AI, have too many mouths to feed while others, like the industrials, lack competition for dollars. So as the Fed reaches its interest rate-hiking conclusion, the industrials can continue to rally. That's how the Nasdaq could look like a hideously developing head and shoulders pattern and the Dow looks like the place to be. .IXIC .DJI 1M mountain Nasdaq vs. Dow 1-month performance It makes sense. We had too much hoopla involving a legitimate concept, generative AI, and we had too little love for industrials because we knew the quarters would be bad, and, for the most part, they were just OK, unless they had an aerospace or energy-saving component. Weirdly, General Electric (GE) was most blessed with both of them. Now that the quarterly reporting moment is complete and we find ourselves showing tremendous remorse for paying so much for anything that has AI as its tentpole. Look no further than ServiceNow (NOW), which tied its flag to the AI mast and ran up to $614 per share for a new 52-week high in July and is now down more than 9% from there to $557 as of Friday. I like using this one — and not, say, Nvidia which hasn't yet reported its quarter. That makes it harder to game. Nvidia is set to release earnings after the closing bell on Aug. 23. Of all the techs I follow, I think ServiceNow probably had the best quarter. ServiceNow, with revenues and free cash flow more than doubling in the last four years, handles precisely the kinds of tasks that AI is meant for: the managing of the digital and often mundane workflows that we think AI is supposed to work with hand and hand. Jensen Huang, co-founder and CEO of Nvidia, has appeared with ServiceNow chief Bill McDermott to talk about how companies can benefit from AI. If I ran a large company right now and I wanted to know how AI can make my "knowledge" workers smarter while having fewer and less expensive "support" workers on board, I would pick up the phone and call Bill, as if I didn't already have his number, and say, "Bill, you be my Accenture and my SAP , where you used to work. You tell me what I need to do to digitize, what can be digitized." I think that ServiceNow would be called in over Club name Salesforce (CRM), which is much more about client retention and acquisition or Accenture (ACN) because Accenture isn't known as an AI company, which is probably unfair but accurate. SAP wants to take over your company well beyond just AI. That said, so does ServiceNow. However, I am using it to make the point that at this red-hot minute, ServiceNow has the edge on the elevator company Otis Worldwide (OTIS) or HVAC leader Carrier Global (CARR) or steel manufacturer Nucor (NUE) or Club name and heavy machine giant Caterpillar (CAT)and a host of other well-run industrials when it comes to the certainty of high growth connected with AI. But, there are two things wrong with the ServiceNow story, and they have nothing, zero to do, with ServiceNow: one, the price-to-earnings ratio of 55 and the 43.5% advance of the stock year to date. These two numbers, and not its business, are the true obstacles to the stock's investing desirability right now. When you put it like that, you can see how there are so many lesser companies with stocks that are truly behind the 8-ball — and I would include, for the moment, Club name Apple (AAPL), which has reported, and Nvidia, which hasn't — and face uncertain stock futures. Put simply: we don't know what to pay for any of them and when you don't know what you want to pay that means you sell, which is where we find ourselves. But, that kind of logic is ephemeral. We reach conclusions like that when stocks are going down, not up. We know what to pay when we think a stock is going up, which is the going price. But, when it is going down there is no price to be paid and stocks are, correctly, uniformly for sale. Logically, I could then say let's sell them all and go buy more Dupont (DD), which we just started a position in last week, or more Caterpillar or some GE or Eaton (ETN) or a handful of other industrials. Let's keep some financials because the quality ones can work their way higher. And, let's just stay away from anything else. Let's sell some of the beloved and precious oils — they have gone from being ridiculously cheap to actually almost expensive. But, I won't do that. Let me repeat, I won't do that. That's because at a certain point the ServiceNows and the Salesforces and even the Apples — now in a hate cycle once again — can be owned and the Nvidias can be bought after it reports and goes lower, as the stock seems to indicate. Or, let me put it another way that may be clearer. I love Fantasy Football and I love its relation to picking stocks. The two are so alike it is a little eerie and I even thought at one time that doing a Fantasy Football online program, Bull Market Fantasy, I would help bring in Club subscribers albeit at different employ. True fantasy followers know who is the best by far at his job of getting points and touchdowns. But the real game of fantasy is about how not to overpay for ANYONE. You may know that Christian McCaffrey is the single best player to draft, a fabulous San Francisco 49er running back with great hands and a nose for the goal line. Let's say he is ServiceNow. That doesn't mean, though, that if you have a limited budget and each player costs money, you will want to pay up for him. (Lots of fantasy leagues don't have salary caps but the ones that do are exactly like stock markets.) You want to pay the right price. Right now, ServiceNow and the entire cohort that makes up the AI-related stock group, and here I am talking about the real ones, not the ones who claim AI kinship, are like overvalued fantasy players They have fallen but they are still at the wrong price, the laughed-at price. You don't want to be laughed at buying them here, but you would be insane to let them fall to such low levels that may not last and they will start going right back up again without you. Right now, we are at that odd moment where it is so clear that they haven't fallen enough and we know that we can sell them tomorrow and feel great, just great about the sales. Relieved even. No Fear of Missing Out. No FOMO. But, can we get back in so easily if we leave them now? Or would we struggle? So often Club Director of Portfolio Analysis Jeff Marks and I will look at a stock that peaked at $150 and we would have sold some at $148. Next thing you know that stock is down to $143 and you say to yourself, should I buy it back? And then you think, no way, I sold it at $148, that's way too close to $143. Let's let it fall. Then it's at $140. At that point you think, ahem, it's now fallen from $150 to $140. Maybe something has changed. Maybe the story isn't as good. Maybe someone knows something. Or in the Fantasy example, maybe the player has gotten hurt and we don't know it, but some do. At that point, you are frozen. You don't know what to do. And you stay paralyzed at $135, now down 15 dollars from the high, when you should be pulling the trigger. You should be buying. But without the Fear of Missing Out juices flowing, it is very hard to pull the trigger. I think, right now, we are at the metaphorical levels of $143 for these stocks, where we all know we are overpaying, and it's not too late to sell anything, including the beloved Magnificent Seven. Every one of them. We aren't oversold. We know the market got too heated. We get that there are limited prospects away from these to own without worry. But it just seems wrong to hang on. But at $135, down fifteen from the high, or 10%, it suddenly doesn't seem so dangerous. It doesn't seem foolish. It seems like a good choice. So can you sell now at $143 and buy back at $135, or its equivalent? I say, it is worth it if you can do it and you don't want to mess up your taxes. But it is NOT worth it if you fear never getting back in. And that's the fear I identify with right now. I think your biggest fear here should be the fear of missing the bottom because we are talking about the stocks of the best companies there are. And, they are only getting stronger, not weaker, if the Fed stops tightening and we get some worldwide growth. Bottom line So my take is this: Conventional wisdom just stays extrapolate the lines of the techs and the oils and dozens of other groups and you will make money here. I want to buck conventional wisdom and have good-sized positions in the tech stocks that I actually know are going down — that we ALL actually know are going down — with the hope of actually getting bigger at the proverbial $135 mark. The people who will be selling this week aren't thinking about how to get back in. They are grateful to be getting out. But if you trimmed as we did, or if you have cash, I suggest that you do nothing. Patience. We are more likely at this point to get a greater buying opportunity in the near future than a selling opportunity now. The only case that my thinking doesn't hold up under close scrutiny is if you have little or no cash. In that case, you need to sell stocks pretty aggressively until we get oversold, raising cash to 10% like us. Because when these players reach prices that are too good to believe you will have nothing to buy them with. The twin worries: great prices and nothing to buy them with, those should be your concerns now, not the obvious decline that we find technology undergoing. Yes, FOMO has turned into GMO, or Get Me Out. You can get out. You fear no rally. You shouldn't. But you should feel it down 10% from the high. And, that's too close for comfort, for the comfortability of selling and then buying them back instead of patting yourself on the back for getting out just a few percentage points from where you needed to get back in. Remember, we'll be discussing all these crosscurrents in the market and my outlook for stocks into the end of the year on Thursday at our August Monthly Meeting livestream at noon ET. (See here for a full list of the stocks in Jim Cramer's Charitable Trust) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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