The Selloff Will Be Mild

Oh, shoot! Earnings!!

Yep, we have a terrible combination about to start, the most overbought we have been in some time and projections that could look more like Carmax's (KMX - commentary - Cramer's Take) than the rosy ones many analysts have built into their models.

I hate overbought markets when I am long. I hate them because it means having to trim gains before they could go to the level that I would like, and because I know that an overbought market can stay overbought for a session or two before turning, and those two sessions without big inventory are killer.

The pattern has been that the banks lead the short-squeeze rallies (like the three we have had), and then they preannounce to the downside or get so overextended that they become vulnerable to short-sellers and then panicked longs. Stocks like Merrill (MER - commentary - Cramer's Take) and Wachovia (WB - commentary - Cramer's Take) have experienced those kinds of declines, as have the housing companies.

Those are the most vulnerable again in this overbought moment, although I do believe that the declines will not be as harsh, in part because we have taken care of so many problem banks and insurers. Think of it like this: One by one, we have solved our banking problems. Ambac (ABK - commentary - Cramer's Take) and MBIA (MBI - commentary - Cramer's Take) got away with big capital raises, Bear (BSC - commentary - Cramer's Take) got shut, Lehman (LEH - commentary - Cramer's Take) and UBS (UBS - commentary - Cramer's Take) are able to raise capital, and Merrill got overseas money and can still monetize BlackRock (BLK - commentary - Cramer's Take).

That leaves, of the majors with concerns, only Wachovia, Bank of America (BAC - commentary - Cramer's Take) and Washington Mutual (WM - commentary - Cramer's Take) on the bank side, and their deposit bases are going to make them come out OK; and CIT (CIT - commentary - Cramer's Take) on the lending side, along with E*Trade (ETFC - commentary - Cramer's Take). I don't know about the latter two, but I suspect they will find suitors, a la National City (NCC - commentary - Cramer's Take) today. Meanwhile, JPMorgan (JPM - commentary - Cramer's Take) and Wells Fargo (WFC - commentary - Cramer's Take) are strong enough to buy whatever is necessary.

That's why people are less concerned about the financials, there are simply fewer to be concerned about.

That doesn't minimize the fears I have about the inevitable selloff now that we are overbought, but it does make me more confident that the selloff will not be as scary as the previous few we have had, because the prospects of financial collapse are being taken off the table.

Ultimately I think we will soon all know that the bottom was put in by the Bear Collapse, that Bear is Long Term Capital, and that the money is sloshing around everywhere looking for a home -- witness Lehman.

The bottom has been put in, and I think it will hold when the selloff occurs.

The upside? Limited until we are sure that house price depreciation is a thing of the past.

At the time of publication, Cramer had no positions in the stocks mentioned.

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