Smart Money Gets Crushed

It happened again. The hedge funds rode into the end of September with a head of steam, and the mutual funds marked up stocks violently a few days before the end of the quarter. Those who stayed short going into October were run over.

So, when we got that Goldman Sachs (GS - commentary - Trade Now) labor report, which is more important than the actual labor report because of the excellent research that Goldman has had on the payroll number, no one was prepared for the decline. The mutual funds had already done their buying. The hedge funds had given up for fear of being run over. The speculators got crushed.

So, what happened?

The hedge funds jammed on short after short in precisely the areas that they thought would be hit the hardest on the employment number -- namely, retail, banks, homebuilders and industrials.

You can see how things are playing out on your screen. There is panic in all of those groups. The panic is to the upside. First, Goldman jams up Wells Fargo (WFC - commentary - Trade Now). It was a violent upgrade for the firm that is now considered to be the biggest liar on Wall Street -- something I viciously disagree with, but I am a lone voice in support of these guys. The call was particularly poignant because Meredith Whitney had made her bearish call that every hedge fund and his brother seemed to identify with and execute on. Then, Nouriel Roubini hits the stock market hard -- something that was meant to knock everything down, particularly the financials, and fulfill the dreams of the bears, but mutual funds came back with a vengeance and took the market up in their faces. Roubini only has power in the media, and, to misquote Uncle Joe Stalin, how many divisions (i.e., how much money) do the media have? The upgrade from sell to buy of Goldman by Mike Mayo, a confirmed bear, is just salt in the wound.

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At the time of publication, Cramer was long GS, WFC, BAC, EMR and JPM.

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