Sitting on the beach, you can see 12 miles to the horizon. Life guards, like traders, must get a high vantage point to see all the activity possible. We are most concerned about the activity closest to shore, where the swimmers are. Traders too, are concerned about the next occurring data point- the next quarter, where the quick money is to be made. While we can see for 12 miles out, we generally don’t have to focus attention on that 12 miles. Life guards may spot the occasional shark fin out there and get everyone out of the water, and let them back in after a few minutes when the threat is out of sight. Traders may spot the proverbial shark fin of European contagion and sell stock. After some austerity measures are passed and the threat is out of sight, we will buy our stock back.

What we can’t see is the Tsunami building under the surface just passed the horizon. We won’t be prepared to get out of the way in time. Some will survive by getting on roof tops, but the stairwells will fill pretty quickly. Some won’t make it. This is what happened in the Indian Ocean in 2004 when the massive Sumatra-Andaman earthquake caused a tsunami that killed 230,000 people in 14 countries. Vacationers sunbathing had little time flee to safety. Despite a lag of up to several hours between the earthquake and the impact of the tsunami, nearly all of the victims were taken completely by surprise.

Similarly, the housing- bust induced global recession was the earthquake that caused the sovereign-debt tsunami that is building under the surface. It’s too far past the horizon, and the waves aren’t yet visible in the deep water. But we’ve already received the warning. We too will be victims taken completely by surprise. We have 2Q earnings reports coming out, and they should be good. Greek’s debt and all the European banks that are loaded up with that debt shouldn’t have an effect on US companies’ earnings last quarter. Commodity prices have come down in the past month, and companies ranging rom Coke to AK Steel announced price increases and surcharges so their earnings should have substantial tailwinds. The 2Q reports are the activity closest to shore. This is where our attention will be focused, as it should be. The earnings of companies are always the underlying influences of their stock price over time. However, every so often (in recent times more frequently- keeping in line with George Soros’s theory of Reflexivity) outside shocks will affect the entire stock market and consequently, any company’s stock that trades in the market, no matter how well they are doing. A massive repricing of risk is the outside shock, the wave building under the surface, that we await.

Prognosticating the Apocalypse is a favorite past time of followers of the stock market. The End of Times is always right around the corner. “You stupid retail, momentum-crowd traders don’t know what you’ve gotten yourselves into” is the rallying cry of Elliot Wave technicians (the Nostradamuses of the stock market). It’s not helpful to inform someone of the trouble that looms ahead if there is money to be made now. So where’s what we do: avoid building positions in cyclicals (DE, CAT) but trade them if there is a technical set up- DE has formed a semblance of support and can be bought safely, while CAT has already broken out and is way to risky to be buying now. We want to buy utilities that have yield support- SO is my hometown favorite. My go-to name is NLY in the REIT space. It’s just had an ex-div pullback so it’s ok to buy. WIN is my other go- to dividend payer as it is much cheaper than VZ or T and should have more growth than most investors expect (at least the investors that sold it 2 quarters ago on the bad access line losses- which is way too short term thinking for this type of business model), and WIN can be bought here too. Also, I like the growth names- Cramer’s FADS CAN (FFIV, AMZN, DECK, CRM, CMG, AAPL, NFLX, and throw in ISRG, NTAP, and CRR) and writing covered calls against the common after a 7-10% move. You can tink of it as a bar-bell approach: torrid growth on one end, slow growth on the other end, and nothing in between. There are plenty of good companies that are selling for less than their growth rates with good charts (PETM comes to mind) but we just don’t have room for these stocks in our portfolio. These are the best ways to keep up with the market while maintaining high cash positions. We can worry about outperformance when the market is in an uptrend. Right now capital preservation trumps capital appreciation.