The Absence of Weakness Is ... Strength

SAN FRANCISCO -- It seems one day of relative calm -- Tuesday -- was about all we can expect from the market, which returned to its wild and woolly form today. And there was a lot of "bully" to go with that woolly.

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Even hardened skeptics had to be impressed with the market's ability to withstand the cautious comments from Cisco Systems (CSCO Quote - Cramer on CSCO - Stock Picks). Withstand, and overcome, that is. While Cisco fell 3.4% to $36.25, the Dow Jones Industrial Average rose 0.3%, the S&P 500 gained 1% and the Nasdaq Composite Index jumped 3.4%. Meanwhile, the Nasdaq 100 soared 4.4%.

Additionally, Cisco managed to close well off its intraday low of $33.64 on trading volume of 212.7 million shares, more than three times its daily average, and the second-busiest session for a stock in history. Cisco's ability to shake off downgrades and/or estimate cuts from CIBC World Markets before the company's presentation at a Morgan Stanley Dean Witter conference -- and UBS Warburg and Credit Suisse First Boston after -- did not escape the attention of market watchers.

"All week long, we've seen the reappearance of the buy-on-dips crowd, and they seem to be targeting weakness created by wire house opinions," observed Charles Payne, at New York-based research firm Wall Street Strategies. "This line of thinking goes deep into the belief of many investors that the latest wave of negativity on the Street is really an effort to shake out the little guy."

Retail investors may not be shaking, but Payne mused that "lost in the action is the fact that maybe CIBC is on to something when it comes to Cisco."

Downgrading Cisco to hold from buy, CIBC's Steve Kamman wrote: "Basically, we foresee a period of significant strategic and operation uncertainty ahead in the service provider market and expect Cisco will have to revise its expectations, strategy and operating model to navigate it."

Cisco CEO John Chambers did not specifically lower estimates, but his comments seemed to vindicate Kamman's concerns, which -- again -- were raised before the company's presentation.

Even if the result of short covering, today's action is no doubt going to encourage talk that equities are on the cusp of a significant recovery, particularly techs.

The risk of such thinking was evident after the close, when shares of Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) fell about 20%. Yahoo! posted fourth-quarter earnings that met expectations, but forecast earnings and revenue for 2001 far below expectations.

One stock does not a market make, but Nasdaq 100 futures were following Yahoo's lead, lately down 24.50 to 2416.50 in Globex trading.

Which brings us back to where we left off Tuesday night: The notion that investors might be better served waiting for the "all clear" signal from the market, rather than taking cues from the Fed.

The Whites of Their Eyes

"Certainly there are good reasons to believe there will be a recovery, but it's too soon, based on stock market performance, to position yourself for that outcome," said Hugh Johnson, chief investment officer at First Albany, which manages about $650 million. "The stock market so far is sending a signal that much more will be needed from the Fed before the bear market ends and the bull begins."

Speaking before today's turnabout, Johnson said the action last week reflects the market's indecisiveness. Last Wednesday, "investors decided the Fed would be successful in heading off the hard landing," but concluded the opposite last Thursday and Friday, he recalled.

The money manager is far from bearish, and quite familiar with the veracity of the 'don't fight the Fed' mantra. "I suspect that will be right once again, but the stock market has to tell me that's going to be right, not gurus, economists or TV commentators," he said. "This could turn out to be like 1973-74, and you could end up buying stocks every month for 24 months at successively lower prices."

First Albany continues to overweight defensive groups such as utilities, where favorite longs include Duke Energy (DUK Quote - Cramer on DUK - Stock Picks), Dynergy (DYN Quote - Cramer on DYN - Stock Picks) and KeySpan (KSE Quote - Cramer on KSE - Stock Picks); health care plays Johnson & Johnson (JNJ Quote - Cramer on JNJ - Stock Picks), Pfizer (PFE Quote - Cramer on PFE - Stock Picks), Medtronic (MDT Quote - Cramer on MDT - Stock Picks) and Bristol-Myers Squibb (BMY Quote - Cramer on BMY - Stock Picks); consumer staples Pepsico (PEP Quote - Cramer on PEP - Stock Picks), Safeway (SWY Quote - Cramer on SWY - Stock Picks) and Procter & Gamble (PG Quote - Cramer on PG - Stock Picks); and energy plays Barrett Resources (BRR Quote - Cramer on BRR - Stock Picks), Exxon Mobil (XOM Quote - Cramer on XOM - Stock Picks) and Coastal (CGP Quote - Cramer on CGP - Stock Picks).

Within three to six months, Johnson believes the market will signal it's time to shift from an underweight in those sectors to an overweight in tech and consumer cyclicals, where current holdings include Home Depot (HD Quote - Cramer on HD - Stock Picks), McGraw-Hill (MHP Quote - Cramer on MHP - Stock Picks), Cisco, Sun Microsystems (SUNW Quote - Cramer on SUNW - Stock Picks), EMC (EMC Quote - Cramer on EMC - Stock Picks), Texas Instruments (TXN Quote - Cramer on TXN - Stock Picks) and IBM (IBM Quote - Cramer on IBM - Stock Picks).

But "I have learned to wait for the stock market" to give the go-ahead, rather than acting on hunches, he said. "The most intelligent way to begin managing money is to look in the mirror and confess you don't have a clue where the markets are going to go."

First Albany manages a lot of college endowment funds, which Johnson said affects his appetite for risk. Frankly, he didn't offer specific guidelines for what constitutes that green light from the market, beyond a simple trend of sustained gains. Each investor needs to find what works best, based on his or her risk tolerance, financial situation and assessment of the market.

But for those snickering at Johnson's self-deprecation and apparent timidity, consider: First Albany's funds were up 0.7% last year after climbing 32.8% in 1999, far eclipsing the S&P 500 in both years.

P.S.

In reaction to last night's piece, one emailer wondered if I was discussing what investors should do with funds already in the market, or new money. For the purposes of this discussion, I'm talking about money on the proverbial sidelines, which Merrill Lynch estimated at $600 billion to $1 trillion in a report issued today.