By Michael Baron, TheStreet

 

Stocks roared back in October, ostensibly because the situation in Europe has achieved some semblance of clarity, but anyone paying attention to last week's volatility knows sentiment can turn on a headline.

 

TrimTabs, an investment firm tracking liquidity and fund flows, decided a few weeks back to get on the sidelines. The firm is neutral on U.S. stocks, a position it defines as 0% long, and has even moved its model portfolio completely into cash.

 

"It is almost impossible to keep up with the hour-by-hour developments out of Europe, and much of what we might write in this report about the situation would be quickly outdated," the firm said in commentary published Sunday. "We believe it is more helpful to focus on the big picture."

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And the big picture TrimTabs paints is pretty grim. The firm thinks the outline of a plan that European leaders have come up with isn't going to be enough, and says the action in the bond market backs up its assertion.

 

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"The bond market rightly does not believe the latest bailouts, central bank bond buying, and political strong-arming have done much to address the solvency issues in Europe," the firm wrote. "Yields on the 10-year government bonds of Italy (6.37%), Portugal (11.88%), and Spain (5.58%) all increased in the past week."

 

The two scenarios it lays out for where Europe goes from here are both much more drastic than what the European Union is pushing for.

 

"The Eurozone crisis can be addressed in two main ways: (1) Europe can restructure its banking system and allow bank shareholders and bondholders to take massive losses or (2) the European Central Bank can monetize enormous quantities of government debt," TrimTabs said. "We believe European officials will eventually choose the latter option, although either choice will have highly unpleasant consequences."

 

Other areas of concern are the U.S. economy, and the reluctance of corporate insiders to use their own money to buy stocks.

 

TrimTabs believes the improvement in U.S. data in the past few months has really just brought conditions back to sluggish growth from vulnerable to slipping back into recession. The firm thinks wages and salaries remain stagnant, and that job growth in October won't be sustained.

 

The firm also monitors insider stock sales and is less than encouraged by what it sees. Since the start of October, TrimTabs estimates the total amount of insider buying at $277 million, translating to a daily rate of $12 million, well below the year-to-date daily average of $30 million.

 

So what's the smart play?

 

"We continue to advise investors to hold some precious metals, commodities, or inflation-protected bonds to protect against the effects of the Federal Reserve's loose monetary policy," said the firm.

 

Many mom-and-pop investors seem to share TrimTabs' trepidation about stocks as U.S. equity mutual funds have seen outflows for 10 straight weeks.

 

The S&P 500 ($INX) is still in good shape from a valuation standpoint with a forward price-to-earnings multiple of 12.75, but the fact that it hasn't rallied more than it has is indicative of how big a shadow Europe is casting.

 

For now, it remains a stock picker's market, if investors are brave enough. The best performers in the S&P 500 year-to-date -- names like Cabot Oil & Gas (COG), Intuitive Surgical (ISRG), and MasterCard (MA) -- have all been carried higher by their own stories, rather than by riding the resilience of any particular sector. And the same is true on the downside for the worst performers: companies like Monster Worldwide (MWW), Bank of America (BAC), and Netflix (NFLX).

 

Whatever the reason, the exodus out of U.S. stocks since May has been striking, showing plenty of folks took the adage of sell in May and go away to heart. October's total redemptions of $13 billion, according to the Investment Company Institute, was the fifth straight double-digit outflow, making for a total of $102.4 billion in that time frame.