Gentlemen Prefer Bonds

Suddenly everything we hated we like and everything we loved we hate. That explains the curious action of today, where some stocks, the cyclicals and especially the oils, are being laid to waste, and others, notably the consumer product stocks, are being sent higher almost regardless of how they are doing.

What's going on? Why are we tossing out the natural resource stocks and embracing the stocks that do well in a slowdown?

Three reasons: United States, Europe and China. 

All three legs of the three-legged stool that have gotten us this far having blemishes and those blemishes are showing in a way that's freaking owners of stocks out in a way that we haven't seen ever since interest rates started to soar in the spring.

First, you have to understand that, as has been the case all year, everything comes down to the bond market. Interest rates, which always seemed to be on the brink of busting out to levels we haven't seen in ages, are now in retreat at a pace that we only see when we are about to go into a recession.

Understand, I don't think we are going into a recession. We have seen no earnings reports that indicate we are going into a recession. Other than the disaster of the day, Caterpillar (CAT), no company of any standing has complained about weakness in any economy. It's been the exact opposite. We keep getting surprised about the strength.

But when it comes to taking cues, you have to understand that Gentlemen Prefer Bonds. They turn heads. And heads are being spun by the incredible rally in bond prices -- you can monitor them by following how well the iShares 20+ Year Treasury ETF (TLT) is doing if you don't have a bond screen -- because the move up in bond prices and move down in interest rates is saying that demand for money has dropped off a cliff.

You simply don't get that kind of move in interest rates, where the 10-year Treasury is now under 2.5%, when it was about to break above 3% not that long ago, unless something's gone awry not just here, but there and everywhere.

Let's go over what's hitting at the three legs.

The first, the United States, is pretty darned obvious. There is a grudging understanding that confidence in the country's been shot by the brouhaha in Washington. There's just a tacit understanding that everything's going wrong, from the ridiculous botched health insurance website to the obvious can-kicking about the budget and the debt ceiling. Lots of investors believe that whatever we have seen and heard from optimistic managements has to be discounted because nothing's been learned and history's going to repeat itself.

Europe's been a terrific boost to growth as the European Central Bank's been incredibly easy on the continent, looking the other way at ne'er-do-well banks while the continent gets back on its feet. But it is time to pay the piper and the central bankers want the banks, many of which would have been shuttered if they were in this country, to raise equity. That's going to slow things down for certain.

Finally, China, which has been seeing a skein of better-than-expected orders and economic growth, saw some push back from its own central bank, which didn't inject reserves last night. So, it is possible that China, like Europe, believes the heavy lifting is done and it is time for the economy to fend for itself. Given that China exports 25% of its goods to Europe and Europe might be slowing down, that doesn't bode well for demand.

But the question is "demand for what?" We know that the bonds are saying that there's going to be less demand for money, hence the decline in interest rates, and, more importantly, in commodities. The most visible commodity being hit? Oil. That's why we seem to have lost one of the most important props to the market, the oil and gas stocks. We've seen oil go down for days and days, but the stocks weren't being clipped. But now, the decline is striking fear into all of those people who have bid these stocks up endlessly and the common perception, if you look at the chart, is that oil's got further to fall.

I mention the chart because commodities are often traded on a technical basis and the chart of oil says it isn't stopping here. It goes to $93, so one of the most ebullient parts of this stock market is being torn asunder right in front of us.

What else tells us that demand for commodities could be cooling? How about Caterpillar. You don't get such a hideous decline in its earnings if commodities are going strong. Caterpillar's quarter was all about how poorly commodities are doing and CAT thinks they are getting worse, not better. That's more fuel to the fire.

Finally, there's been a spate of technology companies reporting that haven't had much good to say and last night's comments out of Broadcom (BRCM), Cree (CREE) and Altera (ALTR) remind us how fragile tech spending is. 

Now, money isn't idle in this market. It's always seeking what's working. It's taking the other side of the trade. So, if commodities are really coming down, then the users of commodities are going to do much better. Who uses commodities? How about makers of consumer packaged goods like Hain (HAIN), like Coca-Cola (KO) like McCormick (MKC), the spice company, Kimberly-Clarke (KMB) and Kellogg's (K)?

Money also seeks what will be working. Housing's been down and out of late because houses and loans got too expensive. Housing prices seem to plateaued and interest rates have come down enough to give buyers a second chance. Those who didn't act because they thought they missed the bottom in rates can now be enticed again and the housing stocks are rallying. Toll's (TOL) moving. So's Lennar (LEN), Horton (DHI) and Home Depot (HD).

The market's also pulled toward no-growth stocks and secular-growth stocks at this moment. Remember, secular growth still happens even when general demand goes down. Who has secular growth? We know that Google (GOOG) has it because it's figured out how to make money on mobile. We know that Apple (AAPL) has secular growth because the tablets look like to be another hit on top of the new iPhones. Or how about Boeing (BA)? We know from its earnings report and conference call that the airline super-cycle is alive and well and killing it. So that stock rallies huge.

And who does OK in no growth when rates go down? Our old favorites the utilities, like American Electric Power (AEP), Duke (DUK) and ConEd (ED). They've done well since rates peaked and they will continue to do so until rates trough.

So, we've got a rotation out of what worked when rates were going up into what works when rates are going down and it will most likely continue as long as rates and oil continue their trajectories. The problem with these rotations, of course, is that we don't know which is the major chord, the stuff we are throwing away or the stuff we are taking in. Perhaps that's why I always fall back on being diversified. You get less pain and less pleasure, but sometimes that's the best way to make long-term money.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long AAPL.