Cramer Rewrites His 'Knowing the Top When You See It' Column

The Trader gives a more detailed description of what the top might look like.
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I wanted to rewrite this

article because so many people requested that I write a "getting out before it breaks" story. The simple truth is we never know when the market is going to roll over. But we do know that there have been warning signs. So I am redoing this personal finance piece to flesh this theme out and to give you more of a read on what the market might look like before it breaks.

One point I want to make, though, is that everybody is always worried that, when the book is written on the era, it will have you in at the top. I think that's the wrong way to look at it. Having loved the market for almost 20 years, I am proud of having done my best to try to make you money. I saw the opportune side, not the pessimist/cynic side, and if I wanted to, I could call a top right now and never sully my name, having pushed this market, in one form or another, since

Dow

800. But I don't believe we've reached a top, so I can't.

Believe me, it would have been much easier for me to tell you to get out. The dynamic of a "get out" call is terrific: You are wrong until it happens. The dynamic of a "stay in" call is awful: You are the goat of the game when it ends. I pick stocks. That's my living. I like a lot of stocks. If I hated stocks, I wouldn't be telling you to buy, because my interests would not be aligned with yours, and I am trying to align our interests whenever possible.

When we started

TheStreet.com

, I used to get dozens of emails every week accusing me of master-minding our coverage, of talking to

Herb Greenberg

, of pumping the site full of names I was long and then dumping into the strength I'd caused. Fortunately, over a 3-year period, people have come to see what I do as something different -- a diary of what I am seeing, hearing, feeling and doing. I am buying stocks. I can' t therefore tell you I am getting out.

In this piece, however, I talk about the conditions that would make me change my mind. I want you to know that there are situations that would make me change my stance and turn bearish, but they have not occurred. When they do, you will know them when I do. After all, a diary is a contemporaneous, unexpurgated affair.

Most of you who come to the site are casual players of the mania stocks. I call them that so I don't lose you. On Personal Finance Friday, I like to keep things simple, not simplistic, and talk about the longer trends that affect you both as a stock holder and a mutual fund holder in the wilder things occurring in the market.

(The rap against TheStreet.com is that it's for daytraders. I am tired or refuting the rap. I write on Fridays the exact same pieces I wrote for years for American Lawyer, and then SmartMoney, New York Magazine and GQ. The exact same ones. Those columns were extremely popular among all kinds of investors. They weren't about daytrading. In fact, they were against it! (Remember, all that I want with these columns, and all that we want at TheStreet.com, is to make you a better investor, a better trader or a better client. We are about helping you to make money, in whatever fashion that makes you comfortable. And we don't want a commission or a percentage of your assets. We just want you to be a member of the club.)

This week I want to discuss not when it will end -- which is the hopeless mantra of everybody who is out and wants you out -- but what it will look like before it ends. Isn't that what we all want to know anyway? Isn't that what the issue is?

("When will it end?" is the most-asked question I receive in my mail. This piece was written in response to all of those emails, and I will point you to it any time you email me and ask me this question in the future. It is not when it will end, as if there were a specific date, but it's how it will end. That will allow you to get out. (The end is like rain -- you want to know it is coming before it does, as anyone can call rain when it's already raining. There are signs in the air that it is going to rain before it does -- including my cartilage-less knees. And there are signs in the market. These are the signs.)

So, let's do it in checklist style:

The underwritings fail. These are the greatest tells of what is going on in the market. They are the barometric readings for the market. When you see a whole slew of B2B underwritings that don't work, then you should get very worried.

(Underwritings require new money to work or require you to sell other stocks to fund them. When you see underwritings sag below the offering price, that is a sign that things are too heavy, that there is too much inventory, that supply and demand are out of balance. (When you see deal after deal go to immense premiums, that means there is scarcity and a lack of supply. A lack of supply, just like Economics 101 taught you, means that the market should be heading higher. How will you know when underwritings fail? I will tell you. So will others on this site. That's why I advise you to stay tuned.)

Wacky non-B2B stocks go up on announcing B2B initiatives. Take a look at the chart of

Sovereign Bank

(SVRN)

. When it announced its dot-com, the stock tripled. It then came right back down. A host of financial service dot-coms had just started out at that same moment. They had all been skyrocketing. They all crumpled. Be on the lookout for fake B2Bs. That will be a very important top signal.

(When you see a zany group of stocks run on press releases, watch your wallet. That's overly opportunistic business people coming in to take advantage of the hoopla to boost their stocks. Often at the sign of a vicious top, there will be stocks doubling and tripling by the day for no reason other than a press release. When that happens, be very careful. Don't wait for me to tell you to get out.)

A series of secondaries get priced and fail to hold pricing, and yet insiders keep selling anyway. This is a fantastic top tell. When insiders want out and they are not sensitive to price, that means they see the writing on the wall. (By the way, if they are sensitive to price, then there is much more to run.)

(Understand that there are two kinds of underwritings: ones that raise money for the companies and ones that raise money for the insiders. When you see a ton of insiders selling, don't panic -- that's part of the game. But when you hear a secondary for insiders announced and then the stock sinks dramatically from where it was announced, be very, very careful. That means the insiders may be thinking that any price is a good price to sell. (That's a bad sign, an amber light. The light turns solid red when, after the pricing, the stock sinks below the offering price and then keeps sliding. Because to sell the deal, the company had to make the rounds and tell the story. A sinking after the offering either means the story is not liked or the story has changed, for the worse.)

Fidelity

and other traditional mutual fund families own all that they can of the hot names. Monitor this carefully. You want to see if the old-fashioned guys are already in. Once they are in, it is late in the game.

(I have been harping on this ever since I saw it on our message boards. I would like to see the postings and holdings of all the companies, because I watch this like a hawk. If all of the mutual funds are filled up with certain names, there aren't that many buyers left, and it is late in the game. But check out how much is owned of the B2B rotisserie league stocks. Almost nothing. That means we are early, not late, despite the valuations.)

Even the executives at the companies think the whole thing has gotten goofy. When

Syquest

tripled because people thought they had the next

Iomega

(IOM)

, some new executive gave an interview to a wire service saying that its stock shouldn't have been going up as it was. That's a balloon-popper.

(I love this tell. This is so important. Periodically, someone deviates from the script and forgets to say, "Our stock is undervalued." He even says, "I think the price of our stock is a little out of whack with the fundamentals." When you hear that, you say to yourself, "Oh, man -- even the insiders think it is crazy." (And when they do, you should, too. And I am not talking about a Steve Ballmer at

Microsoft

(MSFT) - Get Report, which I am long, saying stocks are high. I am talking about a sharp spike in a stock that management says is unjustified.)

Similarly, the exec who runs Sovereign pooh-poohed his stock's run. That's called a top.

The earnings fall short on some of the bigger companies. Ultimately, this is the most important warning sign. When you see new companies miss revenue forecasts -- and it must be more than a handful -- then you are already dead.

(This is all of that quarterly better-than-expected or worse-than-expected stuff. This is what it is about.)

That's why monitoring earnings is so important.

Right now business is so strong for so many companies that we are spoiled. But a lot of these new companies have new chief financial officers and new heads of sales and new top personnel that haven't played the game. They don't know the rules. When they screw up, it will be ugly.

(The only time I hear, for example, that business may not be red hot at some of these tech companies is when they are switching from one product line to another and there is a pause in the market as new customers assess the product and old customers stop buying the old product because a new one is coming. Managing these transitions is extremely hard.)

The good news on this checklist is that not one single warning sign is going off. We are greenlighted on everything. That's one of the reasons we at

Cramer Berkowitz

are spending so much time on these newer companies. That's why we walk around hoping for some bad economic macro numbers to allow us in. We see that things are still strong, and we want to participate.

(I can't learn these companies alone. As I said on our television show, it was a discussion on our boards about

BEA Systems

(BEAS) , which I am long, that got me in the stock. (You have to understand that if we all chat together about companies and get the skinny on stocks, we will make money. If we root for stocks or print inanities about stocks, we generate a lot of page views -- lord knows that would help some things -- but we don't help you make money. When it comes to chat, I am a quality-over-quantity guy, and our chat is the highest quality out there. We will never get credit for it because it is in no one's interest to write about how good our chat is, except for me, because I am making money off of it. (And I want you to know that. I hear out there that there are a lot of restrictions about going in to the chat area. Here are the only restrictions I know about: Don't lie, and disclose your positions. Unless the chat takes place in the North Korean Parliament, you are OK. It is speech.)

That said, remember that things can change on a dime. You can't be the guy who buys Sovereign at the top, or Iomega at the top or Syquest at the top (remember that).

That's what kills you.

(Remember my point: We don't know when the top will be. We do know that there are characteristics of a top. You now have the ones I am looking for.)

Random musings:

This column was directly related to an email I received from a reader, as are all my Friday personal finance columns. I won't answer individual personal finance questions, but I am happy to speak generally on the site as a rule. ...

TSC

Chat board home run: Because of an extremely intelligent discussion in the BEA Systems chat board on our site, I was able to snare 10 points in the stock. I think it goes higher.

(That chat made me another 25 points on Friday. Just telling you the facts.)

Be sure to check out the latest standings in Cramer's business-to-business rotisserie contest against his colleague Matt Jacobs.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At the time of the rewrite, his fund was long Ariba, BEA Systems, Internet Capital, Microsoft, VeriSign and VerticalNet. 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

jjcletters@thestreet.com.