We don't tell the truth enough in my profession. We don't lie -- we just don't tell the truth. This piece is about the internal struggle we are having over putting our sidelined cash to work. We're afraid to give up performance, but we worry that we'll miss the whoosh up that might occur if things turn better. I want to use this to talk about what can happen next week and where we are now.
We are all so used to the snapback that we have come to bank on it in a way that may make it jarring if it doesn't happen.
(On Friday, it didn't happen. Like the Friday before the Monday of the crash, it did not hold. In fact, though it enjoyed a blip up beginning at 3:45, the day was miserable, a total knockout for the bears.)
Understand, I am not a technician.
(Technicians are drawn to patterns. I am also drawn to patterns, and I like technicals, but I always let them take a backseat to the fundamentals. One of the bedrock principles of technical analysis is the belief that the 200-day moving average of an average represents a true snapshot of where it's going. When it deviates too far from that average line, it is either vulnerable to the downside or attractive to the upside. For much of the last few months, the Nasdaq average has traded well above its 200-day moving average. It was extremely vulnerable technically. Now it has come down hard. On Friday it bounced right at the 200-day moving average. I suspect it bounced there because enough people follow this stuff to make it self-fulfilling. In truth, it could be meaningless. If the market slices through the 200 day, then technically it's broken and very vulnerable. But that could be meaningless, too. The fact that I believe it could be meaningless is what makes me a nontechnician. But I have made too much money not paying attention to it to feel otherwise.)
Neither is my partner
(But our head trader, Todd Harrison, is very technically inclined and he was jumping up and down, saying we had to buy on Friday when we hit that 200-day moving average. We did, and while it didn't feel good at the time, it did begin to trade up from that. Maybe there can be follow-through on Monday. It did, however, prove to be a prescient level to wait for, which is more or less what we did on Friday.)
All I can do is tell you the truth about what we're thinking, as opposed to some bold statement that we will retest and then move right back up.
(In other words, I don't know if it will hold, and I don't want to pretend to you that I think it will. In fact, I look at stocks individually and think that about a third of the stocks in the market have already bottomed, another third are groping for a bottom and still another third will certainly not bottom. It's my job to avoid the last, find the first, and stay close to the middle.)
I will not be trapped into being a guru when I, unlike many of the talking gurus you see on TV, am skeptical and not sure whether we can "hold," so to speak, because the psyche among those who are in the market is so damaged.
(If you ask me what I most dislike about TheStreet.com, it is the need to tell you what I'm buying and selling. I want to tell you why I'm buying or selling and explain to you how fallible -- if not chimerical -- my reasoning can be. You aren't supposed to do that. In our business, from day one you're supposed to either believe in, or pretend to believe in, a methodology that produces surefire results. Abby Joseph Cohen, for example, speaks about how undervalued or overvalued the S&P 500 is, given what the collective earnings might be for this year. I like Abby dearly, but frankly, this methodology, if rigidly adhered to, would have forced you to miss much of the market of the last few years. The trick is, she didn't rigidly adhere to it. She allowed it to slide just enough to be able to stay bullish all of these years. Other people -- technicians -- are bullish when it's going up and bearish when it's going down. That has no value added, to me. Tell me something I don't know. I try to pick stocks by anticipating the psychology of the market and overlaying that on the cycle of business that involves the company I am examining. That's my modus operandi. It has produced excellent results for me over time.)
Step back with me. We were playing this market full bore until it got a little ridiculous and stocks started jumping 10 and 15 points a day. It got so crazy that we took a huge amount of money off of the
table. Huge. Now, if you did not read me every day, just occasionally even, you know I did this because I said it a gazillion times.
(People keep wanting to know how much I took off. OK. At one point we had taken off as much as 60% of what we run. We left the office Friday 50% invested, fully hoping that we could buy them lower Monday. Frankly, we would have put more money to work but knew anything we bought Friday we'd be down on, so it took a tremendous amount of fortitude to lose money swiftly Friday in order to make money Monday. Of course, we don't know if Monday turns things around, so we want the cash available to be put to work. I've shared all of this on the site many times this week, indicating that I didn't trust this market one bit. That is my view as a professional. Had the market done a big V ramp up today, I would have been furious at myself for not committing more than we did. Had the market kept going down, I would have put in more capital and felt miserable. It's the balance between those two that is the business of money management.)
Now that the money is off the table, Jeff and I are fighting hard not to put it back until we see the signs we need to form a bottom, and they are not just a successful retest of the lows.
(In this case, we exceeded the lows and went to the 200-day moving average, enough to inspire some technical buying.)
There is much more to it than that. We want to see supply dammed up.
(We started seeing deals cancelled galore on Friday. In fact, rumors of some big-deal cancellations hurt lots of companies that might have expected to benefit if the IPO market had stayed hot -- companies like the Wall Street Journal, Merrill Lynch and even Exodus (EXDS) , the Web-hosting company. The trick here is to get supply cut back without having to ratchet back expectations from dot-coms. For example, Sun Microsystems (SUNW) - Get Report went out of its way to talk about how only 10% of its orders go to dot-coms. A few months ago, it might have wanted to hide that fact. Now that dot-com spending is certain to slow because the underwriting market has gone sour, we'll have a new set of winners and losers.)
We want to see better earnings than we have seen.
(Sometimes the market is so bad that earnings don't matter. We started hearing that kind of talk at the end of last week. Sun's earnings were said not to matter. I think they always matter; they just don't always control. Right now fear is in control and we don't care about earnings. That could change on a dime though.)
We want to see more cash pile up on the sidelines.
(What a fiasco this was. It turns out that nobody had any cash lying around to put to work. In fact, the margin calling started all over again and the people in those daytrading houses got their clocks cleaned. The mutual funds, so used to worrying about their jobs because they have too much cash, will now worry about their jobs because they didn't have enough. Can the market keep going down without new cash? Yes.)
We want to see some numbers from the consumer that indicate that the
may have wound up its work. (That seems like a possibility given the declines, by the way.)
(If we hadn't gotten that nasty consumer price index increase, we might not have fallen so hard. The simple truth is that these numbers increase the possibility that the Fed takes short-term rates to where you can make a lot of money doing nothing. At 7% in cash, returns could really snag excess capital, especially when any excess capital that was committed to the market in the last three months was most likely obliterated.)
That doesn't mean we won't commit some funds tactically. We have a big cash reserve. We committed a third of it yesterday into the free fall. Does that make us bullish? Does that make us bearish?
(The day I wrote this, we sold all of that stock and more into the fade opening, where the market opens too high and there is no follow-through other than to the downside. You have to be extremely nimble to do this -- something that we are. We didn't want to get caught in a nasty downturn with too much stock. Still, as we are a mostly long fund, we gave up some percentage points on Friday. You can't be too defensive when the market craters.)
Heck, it doesn't make us anything. We have stocks we like and when they get hammered we buy them.
(We buy down on a scale. We approach things as if it's impossible to know where they'll bottom, and we commit capital in slices and levels. We don't like to commit capital all at once because that's a level of arrogance that we think is unnecessary and not respectful enough of the bear.)
We did some shopping. We did not do it idly and we did not do it with any conviction. In fact, the main reason why we did it at all is that we are fallible enough to know that when they turn --
if they turn
-- it is impossible to buy them because you only have seconds to act and everybody is acting at the same time.
(This idea of buying something, even when you don't think it may work, is part of the equation of not calling a bottom.)
In other words, the turnaround is so swift that if you think you can act on it you are kidding yourself. We are basing that on the turnaround nine days ago. We don't know, of course, if there will even be a turnaround, or if it will be as swift as last week's turn. We do know, though, that markets that decline 20-something percent in a couple of days tend to snap back, so we want to have some stock on for that snapback.
(Here is the crux of the debate in my office every minute. Given that when it turns, it's too late to buy, we have to anticipate the turn. But if we anticipate too aggressively, we give back hard-earning performance. Then we will have failed our mission. We've had many days like Friday, where we felt terrible about our buys and then caught a huge rally the next day. The only thing that most people are not expecting is a huge rally on Monday, so it certainly is a possibility.)
For those of you who didn't take anything off the table, I feel for you. You chose to say that it didn't matter. It turns out to matter.
(I got a lot of emails from people who at the time criticized my take-it-off-the-table call because it would mean paying huge taxes. To an emailer, these people now have no profits to pay taxes on.)
For those of you who were margined and stayed that way, I know the truth; you've probably been blown out by now. That's just what happens.
(I know many people who were done in by Friday. Just wiped out.)
And for those of you who have become dependent on the regenerative dip, this time your dependency will be sorely tested.
(This was really right. The V didn't occur. That kind of bottom, if there was one, was not really reached Friday.)
Make no mistake about it: Many, many people were caught by this market's vicious decline. But many other people navigated to more cash and to positions like the foods, drugs and banks. Regular readers know we did that. Those who aren't regular readers, who perceived me and our firm as one-trick bulls who knew no limitations, simply misjudged us. We are professionals who have traded for years and know the important thing is to stay in the game.
(There is my credo in a nutshell. Stay in the game. Don't get blown out. Wait for better times. They will come. This too shall pass.)
Be sure to read
Part 2 of this column.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Sun Microsystems, Inc. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. 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 invites you to comment on his column at