Thursday's pullback and huge spike in volatility (the VIX has risen nearly 50%) remind us that there still are sellers out there. I even learned a new phrase while reading market coverage: "FANG Flu."
Now, it's easy to overreact to one day's trading action, and I'd caution you not to do so. However, there are broad trends forming in the markets.
For example, I wrote two weeks ago about the nascent group rotation away from the tech titans. That's what I'm predicting for the third quarter -- more choppiness and more days like Thursday, with continued bouts of FANG Flu.
The way to protect yourself against a rotation out of tech is obviously to sell your tech positions (or at least parts of them). After all, you don't have to have as much gray hair as I do to remember what happened in the summer of 2000.
When I was writing my column two weeks ago, I went back and read news reports from the original "Tech Wreck" in the summer of 2000. What's striking looking back to those days is the lack of a single catalyst for the tech selloff.
It wasn't an earnings miss from a then-bellwether like Cisco (CSCO - Get Report) or Yahoo (YHOO) , nor was it an implosion of a name with horrible fundamentals, like Pets.com. No, it was an orderly rotation out of a sector whose valuation Wall Street couldn't justified by any analytic method. Valuations were just too damn high.
If that feels familiar, it is because that's exactly where we are again today, with the S&P 500's price-to-earnings ratio at a 13-year high. Individual Nasdaq stocks are trading at ridiculous multiples and groups like semiconductors were until Thursday's pullback trading at inflated multiples vs. historical averages.
The semiconductor industry is heavily cyclical, and anyone valuing those stocks as secular-growth plays due to flimsy conceptions like the role of artificial intelligence is making the most fundamental mistake in equity investing -- thinking "this time is different."
As a cub analyst, I was taught that the four most expensive words on Wall Street were "This time is different." It's not different now. It never is.
So, that's what I'm looking for as we move through the summer. Not a tech wreck, but an orderly transition out of names that are trading at 100 P/Es or higher.
For example, Amazon (AMZN - Get Report) was trading at 148x the last time I ran the numbers, while Tesla (TSLA - Get Report) has no "E," so its P/E is incalculable. I expect money to rotate out of those stocks and into names that are trading at multiples that aren't so astronomical.
Where to Invest Instead
Bonds remain an attractive safe haven, and I continue to find values down the capital structure in preferred stocks. (Consider my two Real Money "Best Long Ideas" stocks -- Navios G Shares (NM-G) and Frontier Communications Preferred A Shares (FTRPR) .)
In terms of market sectors, energy is really the only one that's not expensive relative to historical levels. However, energy stocks' volatility can be challenging (to say the least).
I'll have a few specific names for you in my next column to give you a headstart on what I believe will be a rough third quarter for stocks. After six months of "Buy! Buy! Buy!" hysteria, it's important to protect yourself against what I see as a coming seller's market for stocks.
(This column originally appeared on Real Money, our premium site for active traders. Click here to get great columns like this from Jim Collins, Jim Cramer and other writers even earlier in the trading day.)
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