Good trading is so much like good football that it's scary. Take last Friday's action. By all rights it should have been a day to hunker down, run off-tackle, keep the ball on the ground, just try to contain the losses to a few million dollars.
But right before play began, it was so obvious that the other side was blitzing too hard that you had to call an audible and go for broke. And with the Dow opening down 70 points, you had to buy every stock that looked to be crushed by 9:45 a.m..
Let me give you my game plan for how I approach days like Friday for it might help you trade better yourself. At 8:30, with the bonds down more than a point and the Globex futures down 10 points--indicating the equivalent of a 75 point rout--no one could possibly be bullish. Japan had crashed, again. Europe looked awful. Suddenly a Fed tightening was in the air.
In my meeting with my research director, Jeff, we first crafted a circle-the-wagons strategy. "Let's see what we can jettison, and see what we can save," I said. We earmarked a half-dozen positions for ejection and another four for paring. Seemed rational.
But as the market neared its opening, and I got my looks from the floor, it was clear that everything was opening way too low to sell, even if the precipitating event, the stronger-than-expected unemployment report, should hint that a pick-up in inflation was imminent. Philip Morris was looking down two despite some positive news out of a Florida lawsuit. Bristol Myers was indicated off a tad even though Smith Barney's crack drug analyst Christina Heuer, had just upgraded it. And Compaq was quoted down three-quarters despite saying the night before that all was rosy.
And then it hit me: I had seen that defense before, the one where every stock lines up red. I had seen it on July 23, the fateful July bottom, perhaps the dumbest day of my career--you judge for yourself you can see me flailing in tonight's Front Line at 9 p.m. Then, with cameras rolling, I let the defense demolish me, even selling a half dozen stocks to Goldman Sachs before the market opened for fear of a potential margin call.
Instinctively, I started screaming "blitz," and switched directions on everything. Instead of selling Compaq I jumped to the buy side. I put in a whole bunch of market opening only orders for drillers and oils, both of which had been very hot lately and had been hyped on CNBC. And I asked Nasdaq brokers to show me any merchandise they had, lapping up Dell, Cisco and a bunch of other four letter favorites.
They were all at the low of the day. One hundred and forty points later I had some great trades on my hands.
What made me know to switch directions? Some of it is instinct. When stocks with good fundamental news that day are opening down it is almost always worth taking a stand. You can bet that even on the ugliest days buyers will come in later to take advantage of the fundamental change.
Some of it is remembrance of bad trading past. After giving away stocks at absurdly low prices several occasions before I refused to be panicked out of solid equities by rampaging futures.
But most important is the conviction I had that the billions the mutual funds had received this week would feverishly be put to work as soon as it arrived--regardless of the macro fundamentals. Sure enough, the decline was so steep and fast that most of the opportunity to invest at low prices had already vanished by the time the mutual fund mail arrived.
Is this any real way to invest? Oddly I think yes. Because what it says is that Americans are saving in a different way. You talk to managers up and down Wall Street and you will hear that the public is reckless, silly and always coming in at the high.
That's nonsense. The public is informed, intelligent and well-grounded, buying aggressively whenever market "professionals" hold a big sale. Collectively the public saves whether they like it or not. Would the pundits like it more if the stock buying masses spent all of their money at Foxwoods or buying expensive baubles? Would they like it if the public shoved their money into mattresses, passbooks or gold, all three of which have generated miserable returns year after year. I think people in this country are now saving at a rate that will catch all of the seers by surprise, kind of the way it caught all the criminologists short when the crime rate really did start dropping.
There is nothing reckless about putting money away into the stock market. And that's a ritual in this country now so ingrained that it reminds me of Japan in the early 80s, before they went nuts speculating on everything.
Maybe I am a Pollyanna about all of this. Maybe I will get slaughtered too when the public reacts with fickle behavior. But I haven't seen anything fickle about the public's desire to save in these last seven years. Something's changed about the basic behavior of the average worker in this country. And it won't be undone by a strong employment number and blitzing futures.
James Cramer is manager of a hedge fund and co-chairman of The Street. Of the stocks mentioned in this article, he has significant positions in Philip Morris, Dell and Cisco. While he cannot provide individual investment advice or recommendations, he welcomes feedback, emailed to Jjcramerco@aol.com.