By James Cramer
To those without a sadistic bent, the notion that this market "needs" capitulation must seem strange. The idea that there must be blood spilled -- buckets, not pin pricks -- before we can rejoice again, must seem right out of Dostoevsky. But it's true. Without giant give-up "prints" getting slapped on below the market there can be no bottom. Because that's how bottoms are formed. Let me tell you what a real bottom -- not a trading bottom like last Monday -- feels like.
I know, because I helped create one.
Last year a crew from
came to my office. It was a hot day in July. Like the selloff this year, the decline was in full force. Every day we would see erosion in our margin run. Everyday we would give back a fraction of a percent. Everyday we would celebrate our own idiocy. I broke two phones, kicked a hole in a chair in Jeff's office, cut my fingers when I slammed my hand against one of my six keyboards. All during this one selloff.
But on this particular day we decided we could no longer take the pain. Within full view of the film crew, at 8:30 in the morning, I had my head trader call a major firm and say the following fateful words:
"We need the capital. We have to sell 100,000 of the following names:
. And we need to sell them before the opening. If you bid us in line we will sell more."
Translated that means we wanted to capitulate. And we wanted to do it ahead of the destruction that we saw would occur in the market that day. The firm made us good bids, so good, that I offered a second tranche of stock to them at 9 a.m.
got jettisoned this go-round.
Whew did we feel relief.
And at 9:15 the broker called us back. He had places to put more stock at our new low levels. "Give him the
," I said. "Make sure we are out of Dayton Hudson."
A cool 200,000 shares of Dayton Hudson changed hands at 28.5. At 9:20 a.m. A position that had taken months of research, that had required hundreds of phone calls and a massive amount of reading, was gone. Just like that. Relief. I was no longer lugging. Now I could think.
In ten minutes the market opened. It opened terribly, as it had every day for about five weeks. But this time it did it without me. And I felt great. I had avoided the chaos. They couldn't get me this day. We were high-fivin for the cameras.
By 10:00 most of the stocks I had sold had reached the levels I had sold them at before the market opened. Now I knew my good judgment would kick in and the stocks would plunge below the levels I had off-loaded them. I frantically started buying puts on a group of high-flyers, stocks I "knew" were going to crash.
But nothing happened. Stocks just stopped. They didn't go up, they didn't go down. And in one case, Dayton Hudson, the stock didn't even tick where I had sold it. It hovered at 28.75, down a dollar from the day before.
At 11:00 they were still hanging there. They hadn't broken my pre-market print prices. And Dayton Hudson was climbing.
At 11:30, when the film crew was packing up and leaving, it happened, the trade that told me that
had just filmed the capitulation bottom, that they had caught it on videotape, to be used against me forever and ever.
"Trading 200,000 Dayton Hudson at $29, open to sell."
Translated, my block of Dayton Hudson, purchased by the brokerage firm at 9:20 a.m., was now going to trade up a half point from where I sold it.
The print had held. The rally had begun. Dayton Hudson never looked back and was soon trading at $45.
doubled from that day in less than six months. Same with
. The banks I sold? They never traded a penny lower. Still haven't, even after last week's carnage. If you had held on to what I sold between 8:30 and 9:20 a.m. that morning, you'd be up about 50%. And the puts that I bought? Two million dollars worth of protection? Up in smoke. Every last one of them.
This time around I haven't had to ask for bids before the market opened to try to take away the pain. I am determined to hold on through this. Unfortunately, so is everyone else. Therein lies the problem. Until somebody blinks, we are going lower.
Irrational Exuberance Watch: Not good. One lead story in The
which talked about wiping out '97 gains; but today's story about small fry staying put trumped that. Newsweeklies still not writing death of bull articles. Sliver of hope:
Byron Wien suggesting that market timing might come back into fashion. If momentum investing disappears, which it sure looks like is happening, what will replace it? Wien is suggesting that perhaps "brains" will replace it. The need to be in and out depending upon the circumstances. Sounds logical to me.
James Cramer is manager of a hedge fund and co-chairman of
His fund holds long positions in
Dayton Hudson, Chase Manhattan, General Electric, Motorola, Intel
. While he cannot provide investment advice or recommendations, he welcomes your feedback, emailed to