Does a market need a reason to go down? We always want to ascribe one based on the "fundamentals", because we want rationality. It makes us comfortable and makes stocks seem less casino-like, with a casino largely being considered based on luck, not strategy.
But I saw something happen yesterday before, during, and after the Fed spoke, which had a lot more to do with pattern recognition than luck or rationale. I saw Friday's action playing out right in front of me on the screen once again.
If you think back to Friday, you had money coming out of tech from the get-go, led by vicious declines in Action Alerts PLUS charity portfolio holding Apple (AAPL - Get Report) and Nvidia (NVDA - Get Report) . At the same time, you had heady advances in the financials and the industrials and some retailers and oils. It was as if the money was rotating out of tech on a roughly two for one basis -- twice the amount of money coming out than going in.
Now let's parse Friday's tech selling. The proximate cause of the Nasdaq selloff was a story -- never refuted -- about how Qualcomm (QCOM - Get Report) isn't going to ship Apple its best chip, implying that Samsung was going to have the faster phone and attendant bragging rights. As that story made the rounds, the selling intensified pulling down the well-known Apple cohort. At the same time noted short-seller Andrew Left simply pointed out that a very good company, Nvidia, had become too hot a stock, a casino stock, with tourists as its holders.
That put Nvidia in a tailspin.
Why are these two stocks, Apple and Nvidia, so important to the market place? Because they encompass everything that's been working: cellphones, social, gaming, mobility, artificial intelligence, internet of things, the works. Nvidia and Apple can represent the Nasdaq.
But let's not dwell too much on those stocks, because the reality is, those are not real good reasons to sell a lot of tech; they are just visible reasons. Tech stocks tend to be sold for one of two reasons: 1. Too much supply in the form of IPOs or secondaries and 2. Massive shortfalls. Neither is in place here, telling you that something else is at work: a classic rotation based, ostensibly, on valuation.
Which brings me back to yesterday's selling. It was the same pattern: Apple led the decline and then Nvidia -- after having its target price bumped up by Goldman and hanging in there all day -- then gave up the ghost.
Again, we could argue that there are those two stocks leading down the Nasdaq. Again, though, there's nothing wrong with the companies. Again, though, their decline calls into question all the relevant themes, from gaming, to artificial intelligence, internet of things, social mobile, whatever.
My point? On Friday, we had funds flowing out of tech because some managers wanted to liquidate tech. Given that there was nothing "fundamental" except, you could argue, the endless "valuation" challenge, I think yesterday was a continuation day from Friday's rotation out of tech into banks, retail, healthcare and industrials.
Why wasn't this obvious? A couple of reasons.
First, the money came out of tech before it went into to the new "winners." I think that's because whatever managers are making the switch -- and it doesn't have to be a lot of money as there isn't a lot of liquidity -- wanted to wait for the Fed before it made its way into the banks. They started climbing out of a deep hole by noon, but didn't break into the black until Janet Yellen's press conference was over. Makes sense: the buying is tepid, but then gets ferocious as others see the banks headed up, not down, and they tag along.
The retailer stock buying was there from the get go, which was odd, given all of the big headlines about consumer weakness. But Home Depot (HD - Get Report) tipped you off that it was game on for the retail portion of the rotation. I got fooled here. I thought Home Depot was part of a bigger move into housing, because housing was strong all day. But it was really a tell about retail, as the rest of retail picked up steam as the day went on, although housing was never weak.
The drug stocks, the best performers in the health care rotation last Friday, had a bid underneath them the whole show. Same with the biotech: Celgene's (CELG - Get Report) rally stood out like a sore thumb, masked only by the Biogen (BIIB - Get Report) Alexion (ALXN - Get Report) CFO swap that sent Biogen down hideously while rallying Alexion. That group has buyers, plain and simple. Watch UnitedHealth (UNH - Get Report) along with Eli Lilly (LLY - Get Report) , Celgene and Johnson & Johnson (JNJ - Get Report) for further direction today, June 15.
The industrials? Strong the whole day. Now, this was counterintuitive, but again shows you the power of the buying underneath. That's because industrials should have been going down: raising the fund rate, peeling off bonds, dollar rising, and talking hawkishly all cut against the industrials, but it didn't matter. Caterpillar (CAT - Get Report) threw you off here, because that now trades with the energy complex.
So why was this replay of Friday's action all so difficult to see? First, because of the incredibly bearish move in the oils -- something that was contra to Friday's action. The speculative bulls in oil, still a majority according to the Commitments of Traders, or COT report (thank you, Carley Garner, for that tidbit) were busy capitulating after the bearish inventory report threw us off Friday's scent when oil went higher.
Second, the cognoscenti incorrectly attributed all the action to the Fed, which, in retrospect, was a sideshow. There was nothing new, even as several big firms said Yellen had turned hawkish. Third, the soft goods stocks were flying, which indicated to many that the Fed was raising rates right into a slowdown. That was a new wrinkle that freaked out those trying to track and go along with the action.
Now, let's put it altogether. What do we have here? A classic case of a rotation by a large fund family or two out of high valuation tech stocks into other areas of the market except oil. There were so many cross-currents that you had to cut through a triple canopy forest to see it. But that's what it was, and only the funds driving the rotation and their brokers knew the truth.
Oh, and let's add one more layer of darkness. In the evening, the Washington Post reported that Special Prosecutor Mueller is investigating the president for obstruction of justice. While not a non-story -- can we at least go back to why he was appointed? to investigate the president for obstruction of justice -- it caused the overnight futures to go down a bunch of ticks and may have influenced weaker overseas trading.
Given how hapless this administration has become, I am surprised that this mattered. As the calendar slips by, does anyone really think anything pro-business will happen out of Congress? Both sides seem hellbent on wrecking the president's plans -- although we have to doubt that, if impeached, the Republicans would vote for his conviction, because he did so much better than so many of them in their districts.
What to watch for today to test this thesis? A retest down to Friday's levels for tech and a gradual increase in health care, banks, industrials and retail once again masked by oil, which can't really rally because there's no stimulus for it to do so.
Why can this happen so easily? We forget how thin the market is. We forget that a big hedge fund or mutual fund switching out of tech winners into everything else can roil the market.
Can it continue past today? I think so, because we aren't close enough to the end of the quarter to buy back the techs and because there's no catalyst to do so. Again, watch Amazon (AMZN - Get Report) and Nvidia to tell you about the bounce, not Apple, because it is too heavy.
I think that many market observers are too rusty to see the rotation, but that last half hour rally in the Dow was the ultimate tell. It seemed to come from nowhere.
But it really came from last Friday's gameplan and a continuation of the liquidation from tech and the flow of funds back into historically cheaper stocks. It's a rotation, plain and simple. I could say "perhaps nothing more", but given how much of a sea-change it is, that would be underselling its import and the losses it will generate once again today for FANG and its doppelgangers.
Apple shares fell 1.4% to $142.33 at Friday's close. Nvidia dropped 0.6% to $151.50.
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