Cramer on the Allure of Big Drops in Big Stocks

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I'm a sucker for down ten plays. Can't resist them. That's why I started buying

Glaxo

at 6:30 a.m. Tuesday morning, thinking that down ten would turn into down eight or seven by the New York opening.

How do you know which down ten plays work and which ones just evaporate? I use a bizarre rule of thumb. I don't ask whether the decline was caused by a failed merger or an earnings shortfall. My sole indicator is: "Have I heard of the darn thing?"

In OTC land tons of stocks go down ten. And it's just the beginning. Sometimes down ten is a gift, a clearly-marked exit in a smoky skyscraper, with these four-letter gizmos. There are a couple of funds that singlehandedly have moved stocks 20 or 30 points. In a day. Down ten just gets rid of last week's mark-up. They are thrilled to scram down ten, and leave the rest of us holding the bag they created, a bag that contains nothing.

But when a major stock, with cash and products drops ten, I usually take a stab and buy. Because, when a major stock gets poleaxed, I am highly confident that at some point the stock will be upgraded by a large investment house, and I will get a chance to exit at a higher price.

That's how I felt about Glaxo Tuesday. I figured that down ten would trigger an upgrade somewhere. At some point the analyst/sponsorship machine would jerk to life and recommend the stock. Frankly, I was hoping, in my early morning buys, that it would happen before the opening. In fact, I was a bit perturbed that the stock opened where I had bought it and then traded fractionally lower. Sure enough I had to buy some stock at the 53.25 level as the British sellers unloaded on America, and

Merrill Lynch

presciently downgraded the stock from a one to a three.

But by midday the inevitable happened.

Schroder

upgraded the stock and it jumped a dollar and a quarter. I made my point and change and fled. Booked a good trade. Best of the day. On a down day these gains are hard to come by.

Sure this "methodology" is a bit simplistic, but so is much of good trading. You can't sit there, pull the file, go out to lunch with a half-dozen analysts, call management and make an informed judgment. You have to believe that a price decline of that magnitude will turn somebody who was negative into a believer and get the stock going.

I learned this lesson the hard way. I have puked up stocks down ten in my early portion of my career. I joined the fray of those exiting on emotion-only, and then watched, haplessly, when a better moment to sell developed late on in the day. Now I reverse that process, buying the down ten, and flipping it at that better moment.

This midday hold-to-buy change, however, rarely happens when you are dealing with dicier unseasoned high-flyers. Many of these unknown stocks, stocks that you first hear about when

Joe Kernan

announces on

CNBC

that they are cut in half, are often great until they turn bad. But once they turn bad they almost never recover. Rare is the

Oracle

that springs back to life in the same year. Most of the time once they have blown up they are done for and just become tax-loss candidates.

Sure I will miss out on a

Cytrix

or a

Cheyenne Software

, two high-fliers that were both worth buying after they crashed. But I will also miss out on hundreds of OTC names that are half submerged in that quicksand of

Software Publishing

and

Quarterdeck

. Names that don't even get affected by January anymore.

That's no place for a trader to be.

***********

Random Musings:

Tuesday was an overdue bummer. Frankly, markets that go up everyday lose me, so I am thrilled to see some rational anti-exuberance now and then. Don't blame the

Fed

though. Morons who read anything in to this kind of testimony should be ashamed. The essence of the Humphrey-Hawkins presentation is the Fed defending itself in the face of a Congress that wants to see 2% unemployment going to zero percent. Was anybody else as horrified as I was to see the Fed Chairman repeatedly interrupted by guys who couldn't even balance their checkbooks or use an ATM machine? I found myself thinking that if I were Greenspan it would be more valuable to go to the movies or fishing than it would be to listen to these questions. Did you catch the guy asking about money supply? Buy that man a

Journal

. Greenspan has the patience of a saint...

So all of those

Waste Management

numbers were phony. Same with

Oxford

. So what about the execs who perpetrated these frauds, and yes, that's the right word. Indictments? Slaps on the wrists? Do the execs get to keep the money? I guess so. Oh well...

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.