Cramer Strays From Fundamentalism

I'm going to let you in on an odd secret: most Wall Streeters live and die by the charts.

Oh sure, most will never admit it. In fact, they will deny that the stock chart plays anything but a cursory role. Fundamentals, like location in real estate, are supposed to be all that matters.

But I can't tell you how many research analysts I have met who will diss a stock in a second if it looks like it is rolling over or appears to have a "head and shoulders" pattern (prelude to a big decline). Major analysts, who have made fabulous calls and have a strong reputation on Wall Street won't step to the plate if the chart looks bad.

I have mixed emotions about charts. I don't deny I look at them. In fact I kicked out 30,000 shares of a high tech stock today, despite good fundamentals. Why? Because the chart was overextended. But I am too embarrassed to tell you, or the trader who did the trade, the name of that stock, as I am known as a fundamentalist.

And I have a proclivity to turn the sound up when either John Murphy or John Bollinger, two tech talkers, speak on CNBC.

Both men deserve to be listened to. I had a huge hit last year on both the short and then, subsequently long side, when John Murphy called the bottom in the semiconductor index.

Bollinger feels like an old friend. I learned tech analysis from him on FNN fifteen years back. And his work on small cap stocks and their extreme overextension last summer kept me out of the Iomega-led carnage.

However, when I get too reliant on technicals, I often get blown out of the water. I was short a huge amount of Genentech before it received a partial bid, in part because the chart was so gosh darn awful. Crushed me like a bug on a windshield.

The chart emboldened me to double down on my NCR short right before ATT bid for the company. I remember wishing: If only Robert Allen used charts, he would have known not to buy NCR. In the interim I lost a small fortune.

Charts work best as an adjunct. I used to integrate them in the following way. After I had done a massive amount of fundamental work on a stock I would then hand off the idea to my wife, Karen, who was a master technician. If the chart said it was right, we would go in, big. If the chart said it was wrong, we would wait.

This method probably boosted our performance by a few percentage points year after year. After she retired to full time mom-hood, I tried to integrate her thinking. But real technical people have an intuitive feel for a chart that I lack. So, there I was, in the kitchen, showing her a couple of charts of a few of my ne'er do wells after a recent sell-off. Those she got me to average-down worked; the ones she told me to cut losses on drifted lower.

Ultimately, the reason why it is so important to keep an eye on the charts is that it is self-fulfilling. Everyone else is looking , too, including guys at the giant mutual funds. But if you do nothing except look at the charts you will miss some swell bottoms. Last summer charts made Intel and Microsoft appear terminally ill just when they were getting ready to bound amazingly higher.

Similarly, Iomega's chart looked like it was going to the moon both at $50 and then at $27 last year. A lot of chartists died by that sword. The reason: the blasted fundamentals had turned down. Despite my little infatuation with things like "head and shoulders" patterns, a strong shift in fundamentals will screw up a chart every time.