Commentary on yesterday:
Two Trades that Set the Tone
By James J. Cramer
2/4/99 12:15 AM ET
Sometimes big trades, or prints, as they are known anachronistically from the days when trades were printed on ticker tape, define the day.
Two such trades set the tone for me. These were two trades that told me loads about what would happen on Wednesday. One, involving 3Com (COMS:Nasdaq), occurred at the opening. The other, involving GE (GE:NYSE), never even made the tape. It didn't get done.
Still, they were the clues I needed to get a sense of where the action was and what might occur. (Mind you, clues are just that, clues, and they can lead you astray. Many times they have. But not so many times that they can be ignored. And when the clues are right, they are like crystal balls.)
Let's take them one at a time. Old pros, forgive the explanations for things you take for granted; newbies, sorry I couldn't be even more detailed, but 2,000 words on two trades seems unreasonable.
First, the 3Com trade. Tuesday night, on the Cisco (CSCO:Nasdaq) conference call, we heard John Chambers, the head of Cisco, wax eloquently about how he was taking it to the competition. Some of it was by name: the competitive edge Cisco has developed, in Chambers' view, on Lucent. But some of it was just plain generic. Some people put two and two together and reasoned that 3Com was losing big share to Cisco in some of its networking businesses.
Then, this morning, Donaldson Lufkin & Jenrette cut estimate numbers on 3Com. Number cuts always matter, particularly number cuts that take a firm below the consensus, or where all the other firms are expecting 3Com to "come in" at. The DLJ cut took the firm below the consensus. Immediately, when you hear that an analyst cuts below consensus, you jump to the conclusion that the guy knows something. As 3Com has disappointed before (it has also surprised positively before) this one-two punch of Cisco share and DLJ cut meant that maybe 3Com would have to issue an earnings warning.
Earnings warnings are like cyanide in this game; you'd rather not swallow them. So a giant institution -- I have no idea who, as this stuff is protected by brokers with their lives -- decided to bail. With the stock going out at $44, down a couple from the day before, the institutional holder drilled a $40 bid for about 4 million shares. In other words, he sold his stock down 10%.
Big down prints like this scare everyone. I immediately made a half dozen calls to analysts, all of whom said it was entirely plausible that 3Com may be having a tough quarter, because seasonally and historically this is a hard couple of months. Cold comfort.
For the rest of the day these shares slogged around the $40 level until they decisively broke below the trade price. At that point you have a ton of 3Com slogging around "with no home," as it is said in the business. Consequently, the stock created a bit of a lid on other networkers, and I think contributed to why Cisco rallied and then later returned to the $110 level. Guilt by association.
All day the 3Com trade cast a pall on Nasdaq, and despite the strength in Intel (INTC:Nasdaq) and the Net, other traditional tech names were so-so performers. I could see some of this coming because of 3Com.
Suffice it to day, if 3Com had rallied substantially above $40, that would be a tell that demand for tech was very strong, a clarion call, so to speak, to get longer than I am. I didn't hear it and I didn't do it.
P.S. I'm thinking of selling Feb. 35 or 37.5 puts unless it snaps back strong today.
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