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June 28, 2013  Fri 8:12 AM CT

SPX: SEE CHART GET CHAIN FIND STRATEGIES
Was it all a dream? Or, more like it, a nightmare?

A week ago today, this market was annihilated as a confluence of ugliness--the Fed's revising of growth, the collapse of the Chinese banks, and the riots in Brazil. These weren't Portugal or Greece or Cyprus. Huge markets, markets such as the Philippines and Indonesia and Mexico, pretty much crashed as money came out of their bonds and stocks in torrents.

These were very real threats to the bull market in stocks. They were a clarion call that turmoil globally led to buying cash--not even bonds, specifically the 10-year. But look what has happened since then.

The Chinese, who seemed on the verge of causing a Lehman-like collapse in their banking system, switched direction, and instead of choking off the bad-actor banks, actually flooded them with liquidity. Brazil? When a million people take to the streets, you might even expect a coup in what had been a stalwart growth democracy, albeit a corrupt one. Now the government is making noises about cleaning up its act and taxing the rich, and the riots have lessened in intensity. Southeast Asia has calmed down, and the Philippines just had its best two-day back-to-back rally ever.

But no change has been more modified than what the Federal Reserve did to backpedal furiously from its statements. We have in this country a history of the Fed not really caring about the consequences of its actions. If the Fed made a move, you lived with it, and the economy was hung out to dry.

TheStreet.com logoHowever, within 24 hours and a world of hurt in the bond market and emerging markets, key players in the Federal Reserve, including presumably Ben Bernanke, let the Wall Street Journal, the New York Times, and the Washington Post know that the central bank in no way meant to do anything drastic, nothing at all. It was all about watching and waiting to see if we got better data. Since then, we have had some good numbers and some bad numbers in keeping with Fed ambivalence, not Fed action.

Now, we may want to say that we are having one giant do-over in our markets. But that would be false. Interest rates have not come down. Mortgage rates have gone up by a third. We will soon see a dramatic decline in refinancings. The bond funds have produced hideous losses--that is, if you sold them. The 10-year is not back under 2 percent, it's up at 2.5 percent.

And even within the stock market, we don't have the same stocks going higher. Sure, there's been a bit of recovery in the so-called bond-equivalent stocks that were being crushed by the increase in yields. But we are seeing a headlong rush into the cyclicals and into the regionals and into any technology. We can only imagine what could happen if we actually had an up day in China after seven straight down sessions.

So while it may look like we averted a crisis, a crisis that did have people panicked last year, two things have happened.

One, we saw what occurs if we really have the end of bond buying, and it is plenty ugly. You have to scale out of what has been hurt right into this rally: anything in emerging markets, as well as stocks in the housing-related cohort, which will be slowed by the dramatic increase in mortgage rates and the higher-yielding stocks that will not be competitive with bonds as they go higher.

And two, it's time to get more industrial, more cyclical, because that's where the value is, not the bond-yield equivalents. 
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