Add Cramer to the Bottom Boys:
It Ain't a Rumor If It's True
By James J. Cramer
12/21/00 7:26 PM ET
The battle of the rumors gets played out now on a daily basis. The rumor that the Fed
will hold a meeting to ease. The rumor that a major telco supplier will preannounce a
shortfall. The rumor that the Fed could cut rates as early as next week. The rumor that
there is too much inventory in the cell-phone, personal computer or network equipment
channel. The rumor that the Fed is in emergency session. The rumor that an old-line
industrial company is about to go belly-up.
Back and forth the war goes on. The rumor crossfire makes the market awfully difficult
to go short, because, at last, the bulls have something that could surprise to the
upside any minute. (They used to have it in earnings, but that now seems just a
memory.)
Because of the precedence of the Fed easing out of nowhere, just two years ago, no
one wants to be short when the statement of a meeting hits the tape, let alone an
actual one-line blurb that the Fed cut interest rates a quarter of a point in order to
ensure that there be no recession. However, it can still be painful to be long because
of those all-too-frequent preannouncements. We saw this skirmish all day. It was
enough to make your head spin.
At times like this, it's important to point out that there will come a time when the
market will no longer respond to the negative rumors or the rumors will seem just plain
silly and you will want to buy when you hear them because it will so clearly be an
opportunity. At NAZZ 2200-2300 and the S&P down smartly for the year, I think that
time is at hand. Which is why we no longer short the rallies and why we buy the dips,
a strategy put into place when my checklist was met and Todd, our head trader,
turned bullish. (And he's bullish for both a trade and an investment.)
What does it look like when the negative rumors fail to faze the market?
The best example recently of this "rumor failure" came in 1998, when people used to
buy a lot of puts on Lehman Brothers and then rumor that the company was in
trouble. (The puts go up in price when the stock falls, which it would do if someone
were cruel enough to spread such garbage.) It worked at $80 and $70 and $60 and
$50 and even $40 (pre-split).
But when LEH got to $30 the company announced a massive buyback. Initially the
market reacted with skepticism. The stock just sat there. Everybody can announce a
buyback. Everybody. People thought the buyback might have been just for show.
Oftentimes companies announce buybacks and then never even bother to buy. Still,
other times they announce buybacks but they "live" hopelessly below the market,
Wall Street slang for the company that's only willing to pay a steep discount for stock
and is not on the bid side.
But those of us who checked the stock of Lehman, meaning those of us who got a
look at the "picture" or what people "had to do" in the stock (your broker, by asking for
a floor picture, is able to inquire whether there are large buyers or sellers out there)
saw immediately that Lehman was serious about the buyback. The company was
buying stock back hand-over-fist.
Every time you got the picture, Lehman Brothers was there, right underneath the bid.
Any time someone wanted to sell it, the company wanted to buy it. Their buying put a
floor underneath so solid that only a total conspirator would have still been banking on
the negative rumor turning out to be true. That buyback helped put into place one of
the great bottoms of the era.
We saw it again in 1990 when people used to rumor down major banks on a daily
basis, based on faltering real estate loans. They rumored them down until they went
after Citicorp and the Fed chairman let it be known that Citi was going to come out
whole.
This rumor process is important, because when the rumors stop working the
psychology changes on a dime. The shorts have to scramble and cover. The longs are
underinvested. The cash on the sidelines is huge. Instead of thinking that things are
going to go under, you think, heck, I'm too skeptical, there's a major opportunity here.
When that happens you have to move and move fast.
That's what makes it so hard to be short right here. The possibilities that something
good could happen seem somewhat plausible after all of the carnage that has been
wrought. The notion that the Fed could ease without waiting for the next meeting had
real credence today. I simply don't believe you get these smoking rumors without
some fire building. That's what happened in October 1998. I heard the rumors but I
figured they were hogwash. I just didn't think the Fed knew how bad things were in the
system. I have sworn never to be as negative when I heard the rumors as I was then,
which, again, is why I like the market here. (I like some sectors more than tech. I
think I have made that clear. I like the financials and retail more than tech and I
continue to like health care.) The rumors on Thursday made people act differently.
Of course, the notion that someone big could preannounce a bad quarter still played a
huge role, too, so it could offset the "good news" of the Fed rumor. But it couldn't kill
the market anymore.
At a certain point, though, one of these Fed rumors is going to come true and the
free-fire short game will go away. What has changed is that now, with the rumors upon
us and gaining credence, it's just a matter of time.
Random musings: If the Nasdaq way overshot on the upside to 5000, isn't it natural
to expect that it might be overshooting a little under the trendline on the downside? I
don't speak much technically in my columns because Todd is a much better
technician than I am -- as well as Gary and Helene -- but I think that it makes sense
that we have to flirt with this 2000 level before we find a dried-up noncrescendo bottom.
In other words, I am beginning to believe that the bottom will not come when everyone
sells, as much as when no one is left to sell. Seemed like there wasn't that much
selling left on Thursday, although with the Nazz down seven straight days it is within
reason that it can pick up a few points! |
