(OT)Wrong! Tactics and Strategies:
Cramer's Saturday 'Newbie' Column:
The Market's Change of Heart
By James J. Cramer (with one change by VD)
5/30/98 12:15 AM ET
This week's "rewrite" reprises a column from Thursday.
Don't go searching Amazon.com (AMZN:Nasdaq) for the
textbook about market bottoms that I referred to
Wednesday. There isn't one. That's just trader-speak for
discerning a pattern we have seen many times before. (I like
to talk about why markets stop going down because for
many people, the downside seems unfathomable. This
week we had a rapid two-day decline that was
staunched by, well, who knows why? At least I can
help show you some of the clues for moves like the
one we had.)
What happened Wednesday to ignite a rally? Was it really
just a bunch of futures-driven hogwash? (We read many
articles about how futures buy programs "saved" the
day. They didn't save anything. That's just shorthand
for people putting money to work. That they put it to
work in the futures was just quicker than buying stocks,
but it translates just the same into higher prices.)
Mindless short covering? (Remember, many people bet
against the market, by shorting stocks, or selling stocks
they don't own. When they want to ring the register,
they have to do the exact opposite of what you would
do if you owned a stock and wanted to take a profit
after a long run: They BUY stocks.) A meek reversal? No,
for me the "textbook" v-turn. (Traders are always
searching for pictorial ways to describe the action. In
this case, a v-turn is where stocks stop going down and
instantly start going up. Some prefer a u-turn, where
stocks mark time a bit before they bottom. I don't.) No,
what we saw in the market Wednesday afternoon can be
traced to a return of leadership, a sea change that savvy
investors know means it's time to do some buying. (Here's
an important point: I am not saying, hey, it's bottoming
everybody in the pool. That's too glib. I am saying that
I am in the business of buying and selling equities for a
profit -- as opposed to a commission. This level
seemed like a good level to commit capital and I saw
some benchmarks that have worked for me in the
past.)
Before the market got derailed, Pfizer (PFE:NYSE), Cisco
(CSCO:Nasdaq), Dell (DELL:Nasdaq) and the
Internet-related stocks led us higher almost daily. These
were our generals, leading the way. (Every market has its
leaders. I put the leaders on a prominent place on my
market screens. I follow each tick of these leaders like
a hawk. So do others.)
Then these stocks fell off their horses and had to be sent to
the field hospital, where their condition was critical. Until
Wednesday. The fact that these stocks were standing there,
Stonewall-like, in the midst of the withering fire of no man's
land was enough to encourage people to believe that the
worst of the selloff may be over. (We look to our leaders.
We feel comfort with them. If they stop going down,
we feel emboldened. Pfizer had been going down
since Viagra deaths were reported. Cisco had been
going down because of profit-taking and potential
competition from Lucent, and Dell had been dropping
because the PC industry has traded horribly. At some
point, though, all of this news is priced into these
stocks, and then they can rally, even if it is just
because the sellers have exhausted themselves.) They
helped shift the psychology, as did the holding of the 5%
decline from the top that I mentioned in several pieces
Wednesday.
That 5% decline rule is no magic; if you haven't put any
money to work in a selloff, however, that seems as good a
place as any to start, as it has held periodically before. (Had
5% not held, I would have waited until we were down
5% from the closing high, instead of the intraday high,
to buy more. Again, a simple benchmark that has
worked for me. Then if that were pierced, I would have
waited until we were down about 7.5% to buy a little
more. I would have then held back to a decline of 10%
before another commitment.)
In the midst of the bottoming a large institutional money
manager came in and sold puts and bought calls on the
S&P index. (If you are feeling bearish about the market,
you can make a bet against it by buying puts on the
S&P index, the 500 stocks that make up that average. If
the market declines, those puts advance in value. At
one point on this day, a manager who bought these
puts when they were much lower came in and sold
them at a very high level. He then flipped direction
and went long the S&P, logically intelligent, given his
disposition to close out his short.) Nobody knows who did
it, other than the account and his broker. But it emboldened
trader types to be thinking that maybe guys who were smart
enough to see this coming, and profit off it by buying puts
first, were now ringing the register on the short side and
going long. Very bullish.
The massive amount of put buying by Johnny-come-latelies,
well-chronicled in the options column in TheStreet.com, also
added to the belief that things had gotten too negative. (Too
much put buying is a signal of market excess to the
downside, and can be viewed positively, because
when so many people press their bets in one direction
... it rarely works.) And I am loath to mention CNBC. Had
the network not put on a steady Bob Froelich from
Kemper, it might have convinced you that the casino closed
and the house had gone bust. Wrong! (I like that guy; he's
a straight shooter.)
Helping fuel the change, also, was a recognition that we had
seen this movie before. Didn't East Asia take us apart last
October, only to be a precursor to a great rally soon after
Paul Fiondella pronounced that the sky was tipping over?
Didn't we all come to feel that no matter how bad it got over
there, it was still over there and shouldn't directly affect the
Mercks (MRK:NYSE) of the world? (I am not saying that
Fiondella is never right; I am saying that there is a right
way and a wrong way to use him. To be panicked by
him, or anyone else, for that matter, doesn't make a lot
of sense to me if I believe in myself. If I don't, well, I
guess all bets are off.)
Ultimately, this Wednesday was simply one day at the
battlefield. We won't know if it is pivotal for a little while. But,
as my wife told me endlessly when we traded together,
those who shorted the market down 180 Dow points are the
ones feeling the pain at the end of the day. And pain is not
the goal. Profits are. (After the close she tried to take credit
for Wednesday's buys in the midst of the decline, and I am
more than happy to share the accolades, however short-lived
they may be, with her and her newfound bullishness.) (She's
still bullish here on all but oil and oil-related.) |
