By James Cramer
Finding a bottom is no science. If the technicians were always right, we'd only have to wait until 6200 on the
to put all our money to work safely. If the fundamentalists were always right, we'd have to wait until the market's multiple dipped below 15, some 2000 points lower. Then we could sleep at night. If the strategists were always right, then the clients would indeed have all of the yachts.
I believe in subtler clues.
Take Friday. Things looked like they might bounce when I got in at 5:15 a.m. The futures were strong overnight and Europe was calm. But by 7:45 a.m.
had downgraded its former Focus One favorite,
, and the market looked like it would roll over again. Helping it decline was
, which recommended its clients sell some bonds to raise cash and downgraded bellwether
. "Thanks for the charcoal lighter, the fire really needed it," I tell my dazed Pru broker.
My partner, Jeff, was taking a rare day off as his wife was in labor. He snuck away to call me first chance he got, as I knew he would. "Hhmmm, GM and IBM downgraded, that's certainly a good sign."
I told him I could not agree more. In order to put in a bottom you have to pretty much lose every last bull. These two signs of capitulation on top of the myriad death-of-the-bull clues all week set the correct psychological tone -- despair -- for a rally. Especially as the market had already traded horribly for much longer than it usually stays horrible this decade.
picked up on the downgrades immediately, shepherding the worry from Wall Street to Main Street with the speed of light. Wall Street anchor Maria Bartiromo had her most somber face on, talking about how the futures were trading down and the market looked grim. The IBM downgrade took on an almost historic proportion.
The negative reaction to a half-decent payroll report also gave rise to a capitulation bottom.
"Don't you smell it yet," Jeff said on his second call. "Bonds are bad, lots of downgrades. Negative Heard on the Street columns. Papers read like death."
"Not yet," I said. "We will cover our shorts at the opening, but not go long until later."
In the meantime, Jimmy Rogers now droned on in the background about how we will never see 6% yields again "in our lifetime." Ah, hah, I thought, negative sentiment this good comes only rarely and must be duly noted. I jotted down Jimmy's doomsday prediction on a Post-It and slammed it on to Jeff's silent
for his triumphant return next week.
True to the script, the market opened ugly. If it hadn't, I knew a bottom was still far off. Tech looked sickly. Two hundred thousand
for sale. Sellers back in tech. Delayed openings in IBM,
. All the financials. IBM made sense. But Nike, Slob? Nothing was even wrong there. The financials? Sure the bonds were weak, but the financials had been in freefall already. Weren't they overdiscounting the negativity? I asked myself.
My private line rang. It was Jeff. "Any good news?" I asked him. "Yeah, a bunch of delayed openings for no reason," he said, tipping his hand that he had been calling others in the office for quotes when he wasn't maintaining his "vigil."
"Yeah, I know," I said, "we have to put money to work."
And I started buying stocks that I had my eye on for the past 650 points down.
At ten o'clock I stepped off the desk into the quiet of my office for ten minutes to talk to some
-- you know -- guy about reading my column on the radio. When I got back the market had dropped 55 straight points. My private light rang again. "Why did it just drop so bad?" Jeff wanted to know. "How about your wife?" I said. "Nothing yet, nothing at all. Why did it drop like that?"
"No reason," I said. "Perfect," he said. "We gotta cover everything when it falls for no reason."
A quick procession of talking head bears came on
. Mike Metz from
screeched about a sucker's rally and then a big decline. Well, that's certainly in synch with what a bottom would look like. God forbid he would start liking the market after a crescendo.
Jim Stack from Whitefish, Montana, then re-emerged. This reigning bear has frequently marked market bottoms with his Mark Twain-like market obituaries on
. Rogers, Metz, Stack, my God, the ducks are in a row, I thought. The market started rallying. Tech began to take off. Jeff again: "Don't sell anything," he said. "Sell? I'm buying what I can."
By this point all of our shorts were covered and we had committed many millions of dollars. And the listed stocks were starting to follow NASDAQ higher, without the bonds.
Jeff wanted to go over his bear checklist. He had some time as it looked like Caesarian was in order.
Sentiment? Bull/bear perfect, fewest number of bulls in a long time. Panic, in full force, with declines and order imbalances down for no particular reason. Capitulation? Tailor-made IBM and GM downgrades sure help. The S&P oscillator? Most oversold in three years. Put/call? Just okay but that's because the puts were signaling a crash and were way too expensive. On everything. The only way you could make money buying a put is if the market crashed by 2:30 p.m.!!!!
But wait, I said, not every bear has checked in. There is still one more to be heard from before we can commit our reserve.
Jeff knew instantly what I was talking about. He said he would not bother me again until after the baby had been born, as it was foolish to commit our reserve until we had done our final due diligence check, and that could only be done on Saturday.
At 3 p.m. Ron Insana broadcast his report from the Stock Exchange Floor. Perfect, nothing like a bit of high-profile fear from the "pros" on the floor.
At 3:30 a reporter called me all aghast. "Why is the market going up, what's going on?"
Nothing like a reporter incredulous about a rally to mark its true significance as a turning point. I explained that all of the preannouncements are now done, regular reporting is upon us and it won't be that bad. "But aren't the earnings supposed to suck?" he asked.
"Oh please," was my only response. I hung up on him. Too much buying to do to waste words with this guy.
At the close we felt great about our short covering and good about our long purchases, as the market put on a quite impressive show. Sure it could be a Friday covering rally, as we used to have in the '90 bear market. That's why we had to keep our hefty reserve.
With the close of option trading, Jeff brought us good news, a baby girl. Nine pounds eleven ounces, definite potential for the Giants' linebacking core in the year 2018. For once we did not talk about the market, other than to say that we would do our final checks to see if the bull would come roaring back on Saturday.
I got up early Saturday and ran right to the newsstand.
And there it was: the confirmation we needed to commit the reserves. "No Panic Yet" read the headline on the cover of
. Well, that was plainly untrue to anybody who trades for a living. We had lived with gripping panic all week. The final Friday capitulation, the 50 point drop in seconds, was marred by a level of panic I hadn't seen since '90.
But that's only one piece of a two-piece puzzle.
to the lead article, by Alan Abelson. "Time to Panic?" read the headline, over the column of the man who has been negative for lo these last 5000 points.
"Oh, my God," I said to myself. "Bells really do go off at the bottom. Here we are down 650 straight points and Abelson is arguing for panic. Perfect. Genuine homespun wisdom from the sage of
It got better. Abelson, with his tongue so deeply embedded in his cheek as to require surgery for removal, spent the whole first page of his screed demanding that people panic out, now, that it is the only real honest course of action.
The phone rang. It was Jeff. He had taken a moment from his new role of Dad to read
Congratulations, I said to him. "And congratulations to you, too, for calling the bottom." he said.
"Yeah," I said. "Sometimes it is that clear, isn't it."
James Cramer is manager of a hedge fund and co-chairman of
While he cannot provide investment advice or recommendations, he welcomes your feedback, emailed to