How can you tell when too many people are leaning the wrong way? How can you spot a rally before it happens so you can redeploy your forces fast enough to take advantage of it while it is happening?
We all like to have our indicators that we think will yield a tell-tale sign to go long ahead of the back. From time immemorial, for example, Mrs. C. wrote down a whole page of indicators by hand at the end of day to be sure that she had her pulse on the market. She always paid close attention to anything that indicated that the crowd had made a big bet in one direction or another.
She always wanted to be against the crowd.
The most important weapon in her arsenal, in the end, always involved market sentiment. She still polls me for the bull/bear Investor's Intelligence number every Wednesday. I dutifully write it down and have it for her when I walk in the door. And she cares passionately about the AMG data on Friday, however flawed, because she is addicted to supply/demand tea leaves.
Me? I watch stocks. Let's take
, of which I am perennially long. This stock is a great measure of market temperament. Last week Cisco gave a couple of talks in town about medium and longer range concerns. Everything we heard we liked.
However, there was no short-term guidance. At $78-79 we wanted short-term guidance. Yesterday, with the stock at $70, Cisco gave basically the same talk in Boston. This time the market -- meaning guys like you and me -- didn't need short-term guidance. As long as things had stayed the same for a week, the buyers were appeased and the sellers quiet.
I bought more Cisco yesterday when Jeff called me after their Boston conference, and told me that the story was identical to the week before. I decided that the $9 point decline, week-to-week was an overreaction to a "no changes at the margin presentation."
Let me give you the schematic of my mind at the moment of this successful trade. Jeff calls and says, "Everything's fine, Cisco." I think to myself, there have to be shorts who will be disappointed and need to cover their winning trade from last week, and sellers who will be heartened that CISCO is not panicking, and therefore will stop selling. Buyers, who passed at $79, when the stock was in the 30-plus multiple range, now feel more comfortable buying the stock at a discounted P/E to last week.
So I jumped. Even though nothing really happened. I made 5 points. That's bankable.
Of all the things that weighed on my mind at that moment, though, the most pertinent was the short position. I follow Cisco like a hawk. There had been a lot of put buying, a lot of short-selling in the name. The former I knew from watching the options boards, the latter I intuited -- heck I should have learned something by now.
I sensed that the marginal dollar was betting against Cisco, and for this very moment that was yesterday at 11:15 a.m., that marginal dollar was Wrong!
Professionals, full-timers who are reading this, probably say, hey, I do that all of the time. But those of you who read this column to learn about the markets, please understand, some of this is brain surgery. Most of it is just psychology and hustle.
In other words, if guys like me keep giving away what we do, you'll get the hang of it
James J. Cramer is manager of a hedge fund and co-chairman of
. His fund holds a long position in
. 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