Cramer on Stocks That Rally After Blowing Up - TheStreet

Cramer on Stocks That Rally After Blowing Up

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Now if only some of my longs would preannounce!!!

Wednesday saw the most amazing phenomenon, one that occurs at important market bottoms: a stock that rallies convincingly after blowing up. In the morning while I was on Squawk Box, we received the news that

KLA-Tencor

could not meet projections it set for earnings. Revenues, earnings, margins would all be affected. Weakness from Asian economies hurt orders severely. The company could no longer keep silent; it would miss the numbers by a mile.

CNBC's

David Faber

postulated that the analysts who had upgraded KLAC recently would get smoked. David asked me what I thought. I told him it was harder than that, these stocks were down a great deal and you cannot wait until all of the bad news is out to buy. These stocks anticipate bad news like a great quarterback anticipates where his favorite wide receiver will be when he throws a terrific pass. You don't connect if you throw the ball where you see the receiver at the time of release. Sure enough, KLAC went higher immediately. It finished up two-and-three-quarters. A terrific one-day gain.

Welcome to the world of bad news equals good news. (Even as I write this Jeff, my partner, is yelling at me that

DIGI

just preannounced a completely stinko number, and he expects it to be up big Thursday!!)

Many of you are probably confused by this pattern. But take a look at the charts of the following stocks:

Motorola

,

Quantum

,

ETEC Systems

. All three bottomed on similar preannouncements. You could argue that the market is completely wacky, that these are all short squeezes and that they will eventually return to their lowly, downward ways.

Or you could say, as I do, that's the bottom. That's what a bottom looks like. Everybody who wants out has sold already. This is the other shoe!!! Now there is no more bad news coming. Shorts have to cover. Longs who have patiently waited for these stocks to stop sliding now plunge in. Big money, which must be early to take down a big position, is making a stand.

Most important, managements, which may not have acknowledged the seriousness of their problems, are finally coming to terms with them. Once managements realize that things aren't going to get better by themselves, they take action that will hasten a turn. Isn't that what Motorola's stock said when it didn't go down? That preannouncement was a fabulous buy point for the stock.

I have not plunged in when it happens to date because of my

rule of waiting at least one month until after the preannouncement, to see if there is any turn in the business. That rule has caused me to miss quite a few bottoms of late, but it is moving me into down-and-out tech near the bottom, and with a margin of safety that bottom-fishing doesn't allow. My rule did keep me out of a lot of nastiness, but it doesn't work when everybody wants in.

There is still one more theory about why these stocks are bottoming: Business is beginning to get better for the suppliers of personal computers now that computers are being priced to move. Anecdotally, I am beginning to believe this view. It's what my contacts are telling me.

Put simply: The price cuts are working!

That, of course, would explain everything.

James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Mr. 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 welcomes your feedback, emailed to

Jjc@thestreet.com.