A Piece of Advice

Cramer describes another small-cap trading phenomenon to watch out for, 'working a piece.'
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Working a piece. All over the Street, people are working pieces. It is part of the profit-taking experience, and this one column is going to pay for a lifetime's worth of

TheStreet.com

because I am going to describe what you are seeing on the screen.

The stock is National Gift Wrap & Web Co. It's a company that designs Web sites for bricks-and-mortar companies, and it has been as hot as a pistol. The chart of the stock looks straight up. There hasn't been a break. The quarters have all been things of beauty. There is nothing wrong with this stock. Nothing at all. Heck, even the insiders know that.

National Gift is at 56. The bid is 55 1/2. The offering is 56.

Or it was last time you looked.

Suddenly, without any sort of volume, maybe no more than a few thousand shares, the stocks is down 3. Its bid is 53. Its offer is 54 1/2.

You're thinking, Heck, how did that happen? How did it get down that fast?

You call the company. The company has no comment other than to say, "Hey, we just reported and everything is fine."

So you think, Hmm, maybe I should buy some.

Forget about it. Forget it. National Gift has fallen into one of the market's very own sand traps, and there's no getting away from it.

Someone is working a piece. Someone has a big slug of National to go, and this stock is now out of your hands. Only the volume, the dramatic increase in volume, will let you know when it has bottomed. Until then, you will just drive yourself crazy and lose a fortune every time you try to call National Gift's bottom.

Big-cap stocks don't do this. There are always willing buyers for big-cap stocks, usually right in line with where the stock was, if not down a tad.

But younger companies and medium- to small-cap stocks get afflicted by this piece illness periodically, and unless you have worked at a house which merchandises pieces or you have trained at the game a long time, you will think that what is happening to National Gift is just plain madness.

It isn't, of course. It makes all of the sense in the world. Here is what is happening: One of the market makers has been given a very large order in National Gift. Almost like a secondary. It is probably "major six figures" to go.

As long as little orders dominate National Gift, they are matched effectively and there is not a problem. But when someone has a ranch-sized National Gift order to go, that's a different story. That merchandise has to be placed. And not up here at 56.

So market makers go out and hit bids around the Street -- small bids, to soften the market. The only analogy I can think of here is a military one. What you are seeing from 56 to 53 is an artillery barrage, as the market maker working the piece knocks things down to a level where he is sure the piece holds or works for the buyers.

At the same time, he is getting short the stock, and possibly, his buddies are, too. You could argue that he is shooting against the seller. But I have long since dropped the moralizing. He is getting the job done the way he has been taught to: He is placing the stock like a secondary.

When you come in to buy shares while the stock is in one of these self-imposed dives, you are just knocking your head against the wall. Forget it. You are never bigger than a piece. You have to wait until the market maker has knocked it down enough for his satisfaction before you can move.

How will you know when the piece is finally cleared and the stock is safe again? When you see a huge increase in the volume. That's the only tell there is. When you see a stock trade 200,000 shares that usually only trades 30,000 shares an hour -- that's the signal. That is the time you have to pounce.

And pounce you must. Because everyone who is short the stock in anticipation of the piece will have to cover on the piece. The piece, which looked so heavy at 55, looks well placed at 50 or 51. It looks well placed because it is. That's the beauty of how well the market works a piece. The increase in volume shows that the market has digested the piece. The short-covering firms it. The next thing you know, you are out of the sand trap and going higher.

Wait for the volume. Then move. Not before, though. And not much after either because you will just end up paying mid-50s again!

This is a time-honored process. It never changes. It is happening now all over the Street. So be careful out there.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

jjcletters@thestreet.com.