Heed These Words: Risk-Off, Flight to Safety

It's on. It is on. This is how Michael Jordan once described a first half performance to friend/friendly interviewer Ahmad Rashad on NBC's NBA coverage in his prime.

Today's selloff in the equity markets is real, and really necessary. The novel coronavirus, COVID-19, is now truly a pandemic, with instances seen in 28 countries outside China. Health authorities seem to have no idea how COVID-19 got to places like Veneto and Lombardy in Northern Italy from Hubei Province in Central China, and that is truly scary.

So, how should you react? You will read these phrases 1,000 times today, but please don't make the mistake of not heeding them.

Risk-off.

Flight to safety.

This is the ultimate backdrop for a risk-off market, because the risk was so high to begin with. It's a basic number, but a time-tested one, and the P/E ratio on the S&P 500, is a terrific measure of the market's risk tolerance. At over 20x 2020 consensus EPS as of last week, it was inflated to an 18-year high, and I have been shouting that from the rooftops in RM and elsewhere.

What has changed over the past four weeks has been a realistic assumption for the "E". The coronavirus has hampered earnings power in a multitude of industries, and consensus forecasts for ~5% earnings growth for the S&P 500 in 2020 have been rendered fictional by COVID-19. S&P EPS were almost exactly flat at about $161 per share in 2019 versus 2018's level and that flat line is starting to look optimistic for 2020. The market is telling you not to pay that much. It's that simple.

In terms of stocks, the Tech Titans led us up -- and in the process exposed an inefficiency in the markets -- and early trading Monday would indicate they will be leading this market down.

Shares in a company as big as Apple (AAPL) just shouldn't rise 86% in one year.

That inflation brought, Microsoft (MSFT) , Amazon (AMZN) , Alphabet (GOOGL) and Facebook FB with it. All those stocks are in desperate need of a correction. It will happen today.

The second tier of tech stocks, such as Nvidia (NVDA) , Netflix (NFLX) and, especially of late, Tesla (TSLA) , are even more highly valued and thus even more in need of a valuation correction. It's coming.

Watch what fund managers are DOING today, not saying. I heard Warren Buffett on CNBC saying, "Don't buy or sell stocks" today, but I read that Berkshire has been selling AAPL by checking recent 13-F filings. Of course the most extraordinary investor of our time knows how extraordinary AAPL's move was in 2019. Taking profits on an overreaction is always a smart move, and the Oracle is a smart guy.

So, "risk-off" and "flight to safety" will be very much in vogue until the market accurately adjusts estimates for U.S.-based companies' exposure to both a decimated Chinese consumer and a supply chain that has been badly damaged especially with the addition of South Korea to the COVID-19 impact zone.

I wrote in my Friday RMcolumn that "bonds still look good here" and I think the weekend proved that out. There is no "lower limit" for bond yields. 1.4% on the 10-year UST -- which has only been broached briefly in history -- 1.85% on the 30-year -- which has never been recorded -- etc. Those are just statistics now. None of those levels matter in a risk-off market.

Bonds will continue to do well here, and I see no resistance on the price of gold until we hit $2,000/oz. Those assets are NOT priced based on underlying earnings power and cash flows. That is why they are safe. That is why you should be selling portions of your holdings of stocks to buy them today.

It's on. It is on.

(Apple, Microsoft, Amazon, Alphabet, Facebook, and Nvidia are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)

At the time of publication, Jim Collins' firm was long TLT and long TSLA puts.