Blog Posts by Matt Nesto

There's an old adage that goes, once bitten, twice shy, which implies that we humans are quick learners. Hurt us once and we'll be on guard to make sure it doesn't happen again. But what if it not only happened again, but a third time too? You'd think even the slowest among us would be able to pick up on the fact that there's a problem.

That's exactly what we are up against as we turn the calendar and head into April with a full head of steam and some nice year-to-date gains for the fourth consecutive year. The problem, as LPL Financial's chief market strategist Jeff Kleintop explains, is that the past three Aprils have all marked the starting point of corrections.

"We look at these 10 indicators that each of the last three years preceded the downturns," Kleintop says of his latest research note. "They were signals, indicators, that a downturn was coming."

In case you've forgotten, he writes that April 23, 2010, April 29, 2011, and April 2, 2012, were peaks that were followed by 10-19% losses.

"We're watching them closely again," he says, noting that half are signaling something you ought to watch out for now, whereas all ten were flashing warnings in the prior three Aprils.

Among the red flags he's watching this year, Kleintop says falling consumer confidence got a little bit too high and is starting to decline. "We can see back to the spring of the past 3 years that "confidence peaked and then really saw a sharp pull back."

By all accounts it has been an action-packed couple of weeks, starting with the day-to-day drama coming out of Cyprus, some big intraday swings by stocks, and most recently, a back-to-back punch of surprisingly weak housing and confidence data here at home.

While the broader market doesn't have a lot to show for it - either good or bad - a look within the benchmark S&P 500 index shows a creeping contagion has been building for the past ten days. Specifically, the sudden leadership of defensive sectors such as health care, telecom and consumer staples.

"The cyclicals are challenged right now from an earnings growth perspective," says Jeff Kleintop, chief market strategist at LPL Financial in the attached video. "So the defensives are probably going to have a better showing as we get into the heart of earnings season over the next couple of weeks."

Speaking of which, Alcoa's (AA) first quarter earnings will be released after the close of trading on Monday, April 8th, and it's 3-percent drop over the past 3 months has left it as the worst performing stock in the Dow Industrials. That counter-trend slump compares to a 10% gain for the Dow year-to-date, and is consistent with the sudden under-performance being seen in the Materials (IYM), Industrials (XLI), Financials (XLF) and Technology (XLK) sectors.

A week ago, it was only Esther George, the Kansas City Federal Reserve Bank President, as the lone dissenter at the Open Market Committee's March meeting. For the second time in a row she voted against the continuation of the Fed's $85 billion monthly bond purchasing policy, citing concerns that such "aggressive stimulus could heighten the risk of inflation and financial instability."

Since then, the president of the Federal Reserve Bank of New York William Dudley has also touched upon this theme of "tapering" the bond buys, as have the non-voting presidents from Dallas and Philadelphia in recent speeches.

Maybe this trio sees something or wants to send a message.

"I'm not criticizing the Fed for the position they've taken and the policy implementation they have taken," says Peter Kenny, managing director at Knight Capital Group, in the attached video. "But the bottom line is because of quantitative easing, and because the dollar is the world's reserve currency, it does have an impact."

While monthly headline inflation data continues to come in below the Fed's 2% target, Kenny and many other market watchers see it showing up elsewhere "in everything we assume is a part of our daily life."

Before this week, the world already had its share of car bombs and nuclear bombs and dirty bombs and the like. But now, thanks to a moment of unsanctioned candor in Brussels, we now can add "diesel bombs" to that list, in reference to Dutch Finance Minister Jeroen Dijsselbloem, who also happens to be the current rotating president of the 17-nation Euro Group. What Mr. Dijsselbloem said, and his peers have tried to retract, is that the hodge podge handling and depositor-lead bailout of Cyprus was going to be the template for bank crisis resolution in the future.

On the very same day this revelation was made, the Cypriot authorities delayed the re-opening of their banks for the fourth time in a week, amidst fears that depositors of all sizes (not just the €100,000+ crowd) will be seeking alternative places to keep their money the moment they're allowed to.

As my co-host Jeff Macke and I discuss in the attached video, there's growing concern that there won't be any money there once that day finally occurs, assuming at some point it has they have to re-open.

What's interesting is that this tiny island-nation has not only ruined its own economy and leveraged its future, but may have poisoned the common currency well too. As Knight Capital's Peter Kenny writes in his daily commentary, "fear or a lack of trust, once introduced into a conversation, has a way of lingering."

Related: Steve Forbes: Cyprus Isn't Over, It's Still A Disaster

Who in Spain or Portugal or Greece or Ireland today hasn't at least questioned what they used to take for granted? Sure our country has too much debt and too many IOU's, but until a week ago, few held reservations about making a simple deposit. But now that European leaders have thrown out the playbook that's been used for the past three years in terms of the hierarchy of safety of various assets classes (e.g., insured deposits, uninsured deposits, sovereign debt, bank debt) the way forward will be different, in a way that's similar to suddenly driving without headlights.

Whether future crises (and there's certain to be more) in the Eurozone are treated differently or exactly the same, there will forever more be fear and suspicion that the Eurocrats in Brussels might do something rash or random again, and therefore, need to be watched.

It may have been self evident to the signers of the Declaration of Independence that all men are created equal, but when it comes to stocks, no such notion of equality exists. Because of this, investment professionals like Charlie Smith, chief investment officer at Fort Pitt Capital, are able to simultaneously be unmoved by the market yet also quite passionate about particular stocks.

As he discusses in the attached video, when it comes to the S&P 500 (SPY) as a whole, he's not that excited right now. He's neutral on the large cap index and says it's fairly valued in the 1,500 to 1,550 range, exactly where it is right now.

But if you ask him about General Electric (GE), a large and dominate component of that same index, you'll hear an entirely different story. "I think the story on GE is really all about the acquisitions they've made in the energy realm," he says, particularly in deepwater drilling and pumping equipment used for fracking. While this Dow Jones Industrial Average stalwart is still trading at less than half of its peak price, Smith says he isn't in it for a ride back to $60, but rather a clean 10-15% total return move back to the $28-$32 range.

For the more aggressively minded, Smith also is recommending shares of SanDisk (SNDK) here, based on his observation of a seasonal anomaly in the flash memory category it dominates. "Typically you see seasonal weakness for flash from the period after Christmas until about now," he says. But this year, supply and pricing for flash memory are both up, and he says that will be good for sales, earnings and margins at SanDisk for a couple of quarters and could propel the stock to $70.

After a week of self-humiliating headlines and scrutiny, the tiny island-nation of Cyprus and its clumsy Eurozone overlords have put forth a deal and belatedly avoided collapse. In turn, they've also allowed the bulls to get back to business of unabashedly pushing U.S. stocks to new highs.

And so, where once there was darkness and doubt, now exists opportunity, and some sort of unknown financial rescue toolkit that now includes bank deposits.

"At the end of the day, though we may have a rescue deal here for Cyprus and the EU" says Peter Kenny, managing director at Knight Capital Group in the attached video, we are also left with a certain "group-think" that is now uncertain as to where risk actually resides, including depositors. "From here on, (deposit seizures) is part of the equation," he adds.

While the $10 billion Cyprus bailout is tiny compared to other Eurozone rescues, there's plenty of precedent for it to grow and change in the future. And why not, given that the injections into Ireland, Portugal and Greece were 20 to 30 times bigger.

For now, markets worldwide have taken the news well, especially in the U.S. where stocks made an early jaunt into new territory before succumbing to selling pressure.

"The question is, will (the particulars of the Cyprus deal) migrate to other models?" Kenny asks.

It's a well established fact the some of the best hitters in baseball have the dubious distinction of also appearing on the hit by pitch leader board. This can be the result of a lot of different factors, but chief among them is the ability these sluggers have to hang in there when it might seem like a good idea to most others to bail out.

In much the same way, the slow and continuous creep toward Obamacare has shaken many stoic health care investors out of the game, and sent them rushing to the refuge of sectors with less unpredictability. Of course, as in baseball, for those who can hang in there, opportunities do exist within an ever-changing legislative landscape that has trillions of dollars on the line.

Related: Obamacare: 3 Years-Old and Still Growing

Take the health insurers (KIE), for example. According to Paul Keckley, executive director at the Deloitte Center for Health Solutions, this group of roughly 400 commercial businesses has already been adjusting to Obamacare for three years.

"They actually made the changes pretty quickly," he says in the attached video, adding that their "big challenge" now is dealing with state-run health exchanges that allow consumers to shop different plans. "I would say this is a sector that's growing. It's a sector that, as a result of the (Obamacare) law, is seeing government sponsored managed care, especially Medicaid managed care, be a growth market."

In a business that is known for its bad calls and its great calls, it's worth noting that we are witnessing history with one of the all-time worst calls. Investors have been wrong for so long in their attempts to call the bottom in rates that it has almost become a joke. I say almost because it's people's lives and livelihoods we're talking about. But time after time, for the past four years, attempts to proclaim the bursting of the bond bubble have proven to be early and costly.

"It seems like every six months we get the idea that we've reached escape velocity for the economy," explains Charlie Smith, CIO of Fort Pitt Capital. "And then we get a piece of bad news," and it reverses.

It has happened numerous times and the rationale is always the same: after a 30-year, generational run-up in bonds that brought rates to historical lows, the jig is up. Yet as Jim Bianco of Bianco Research recently noted, a 10-year analysis of rate predictions shows that when looking out just six months, the pros got it right only half the time but forecast higher rates 80% of the time. For the record, when that study began in 2002, the 10-year Treasury yield was 4.1%.

As Smith sees it, because of the Federal Reserve's stance (where it ''buffers collapse" and discourages risk-taking outside of financial assets), "We've ended up in this grinding, deflationary cycle where every six months we get an uptick, and then six months later we get a downtick."