Tuesday October 24, 10:14 am Eastern Time
TheStreet.com - Wrong!
Same Tinder, Better Rally
The second move upward seemed to be the beginning of something bigger and better.
By James J. Cramer
Same tinder; better rally.
That's my verdict on Thursday's terrific Nasdaq showing. The week before we saw a similar explosion upward, followed by a swoon that gaffed pretty much everyone who came in after the ramp. That rally could be written off as short-covering, plain and simple. Given the massive amount of shorting ahead of the rally two weeks ago, it makes sense to attribute the first move up to people buying back shares sold short. It doesn't make sense to attribute the second rally to similar action. The second rally seemed to me to be the beginning of something bigger and better.
So let's go through the same type of anatomy analysis that we previously went through, to show you why we're more bullish after Thursday's gains than we were before the second rally exploded upward.
First, the setting: Each day has its own set of circumstances that either creates enthusiasm or suffuses the market with despair. The former began to take hold with the announcement of earnings reports after the close on Wednesday.
Wednesday night saw a plethora of better-than-expected earnings reports from companies representing varying segments of the tech economy. This included several we had expected to be bad that turned out to be just fine, and some we had expected to be awful but were spectacular.
The first was Microsoft (Nasdaq: MSFT - news) . Pretty much everyone expected Mister Softee to guide down numbers on its conference call. I know that seems odd given that a couple of firms had predicted it wouldn't. But the ways of Wall Street are mysterious.
Microsoft, which never had a credibility problem before, has discovered that it is a mere mortal once it has blown things. When it reported that revenues were higher than expected and then said positive things about its future, people were caught off guard. It made everyone feel just fine about personal computers.
The second was Texas Instruments (NYSE: TXN - news) . If Texas Instruments hadn't been so weak to begin with, having gone down for what seemed like months, I don't know how much it would really have gone up. Consider that the quarter reported was in line and it suggested that you lower your earnings in the out years. In fact, we wanted to step up and take a lot of stock at $37.50, but the only reason to do so was that Texas Instruments wasn't horrible.
I began to think to myself that it would be good to have another column in my thinking to go with "BTE," or better than expected -- something like "not bad enough," and it would be the mirror image of what "better than expected" connoted for the shorts. In other words, the shorts had to cover the stock because it didn't stink up the joint.
The third was Broadcom (Nasdaq: BRCM - news) . Here's a company that, increasingly, is getting talked about not as the next Intel (Nasdaq: INTC - news) but as the Intel beater -- ironic considering that Intel could have bought it for a song just a few years ago. Broadcom had one of those simply magnificent quarters. Of course, no one expected anything short of magnificent, but Broadcom succeeded in pleasing even the most vociferous bulls. Other than Juniper (Nasdaq: JNPR - news) , no company has succeeded as well in doing so.
Finally, in the middle of the night, Nokia (NYSE: NOK - news) delivered the ultimate surprise: a sharply better-than-expected quarter that made you feel that the other guys were simply getting the stuffing kicked out of them by the Finnish telco king.
Coming on top of the Sun Micro (Nasdaq: SUNW - news) surprise, a quarter with massive top-line growth, and the positive forecast from America Online (NYSE: AOL - news) , one that was considerably more upbeat than Yahoo!'s (Nasdaq: YHOO - news) , you had the makings of a total change in the market psyche, all in about 12 hours.
It was as if each earnings report were part of a tech jigsaw puzzle that, when put together, showed you that cell phones, high-end computing, the Net and Net infrastructure were all robust and well and that everything you'd previously heard was just plain wrong! Cell phone weakness? Nope, thing of the past. How could personal computers be bad if Microsoft said they were OK on top of positive comments from Gateway (NYSE: GTW - news) ? No way that communications is slowing down if Broadcom's chips are still roaring. And if the Net is so bad, why didn't we hear it from Sun Micro? (And don't forget SDL's (Nasdaq: SDLI - news) joyous report the next day, which put to rest the rumor that optical had slowed down too.)
Now, you may be thinking that you've heard all this before, and that all the good news will only be washed away again by bad earnings. Wasn't Dell (Nasdaq: DELL - news) bad? Didn't IBM miss the big enchilada? Sure Intel stopped going down, but isn't that only because of the reduced expectations? Didn't Ericsson (Nasdaq: ERICY - news) refute everything that Nokia had said just the day before?
I don't think so. I think it's different this time because we now have the key earnings behind us. The judgments have been reached. Barring a sharp fall-off in the economy from these levels, one that would force companies to guide down intraquarter, we have had our last word on the subject and that word is good.
The market is like a person who believes whatever is said to him last. And the last thing said was, "We are in really fine shape here, better than expected for the bulls and not bad enough for the bears." That alone could drive us far higher than you might expect.
The reaction Thursday to all of this good news was real buying by institutions. The sellers were either absent or finished. The buyers had to move stocks considerably to find supply. The supply didn't come from short-sellers, who seem to have disappeared from the playing field. All of this is bullish, much more bullish than the previous week's action, which seemed like so many bears tripping over each other to bring in short bets. The action smacked of the big boys coming in to start putting on big positions.
Of course, everything now gets exacerbated by these trading shops I keep mentioning, where professionals use software to legally run ahead of large mutual funds by lifting the offerings of stocks under accumulation. This buying, which used to be considered unethical, if not downright illegal when I got into the business, is now sanctioned by a system that allows computers to trump common sense. So when the institutions come in to buy, they have to pay far more than expected to take down big amounts of stock, or at least amounts of stock that can have an impact.
In the next few weeks, maybe somebody will report something that will change the positive bias in the tech world. But I don't see anything on the horizon until November. Until then, I'm trying to craft a consensus in our office to get bigger and longer and abandon the cautious style we've adopted.
It's no longer necessary. Things are now too good and stocks are too cheap to maintain that posture.
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