Editor's note: This is the fourth installment of a five-part series titled "Cramer's Crash Course," which outlines the things investors need to know to survive and thrive after the stock market crash of 2000. Be sure to check out Part 1, Part 2, Part 3 and Part 5 of the series!
The Aftermath of Crashes Past
So what has happened before? Let's talk about some other crashes. Let's start with '87 because we played that one to the hilt and it is still very fresh.
First, the parallels: Inflation was a problem; the
was against us; the valuations were high. Now the differences: the economy wasn't nearly as strong; we had far fewer new companies; the public wasn't as involved and it was a heavily institutionalized market.
That week before the crash was a horrible, brutal week not unlike last week. It went down every day. It was the worst week I had ever seen. I remember going to the wedding of my friend Eliot Spitzer, the current Attorney General, and telling some people that on Monday the market was going to crash because everybody seemed very long as they expected a bounce. I had a pretty crystal-clear vision -- you can always ask Jonathan Alter, the
writer about this, because I said to him in front of a dozen people in an elevator that we don't own a share of stock because it was going to crash on Monday. My best call ever.
So why won't it crash on Monday? I don't think it will because this time the biggest hedge funds are not as levered as they were then (at least they say they aren't) and they were very much behind the crash of '87. It is still taboo to talk honestly about what happened that day. The people who were involved are very much alive and very much capable of vindictive behavior. But suffice it to day that when we bottomed, it was because the most macho of traders were just dead broke. Now I think the marginal institutions, while way too long, are liquid, having raised some cash last week. Many many people made a bet in '87 that the bottom was reached in the morning. That proved to be very wrong. That's why we will probably sell the opening Monday if it is up -- and yes, it very well may be up -- because I think it will be faded and a better chance will come later.
I think this could be more like the October '89 minicrash, where a bunch of funds went belly-up after
, a crazed LBO, went bust and there were capital calls all around the Street. That Monday we touched some serious lows and then never looked back. Or in October 97 when
after Barton Biggs
went on TV with his truck of lighter fluid and got the markets' Kingsfords in an uproar. We had a decline the next day that took the market through 500 points off of a 7000 basis and we crafted a nifty bottom.
In every case we had some pure tells that the market was going to hold once it bottomed and I would not be surprised to see these same tells this time. Watch
as money flows to the old leadership first.
If those stocks rally, you might be in for a bottom.
Conversely, if the drugs rally or the foods, and then they fail, we are in a heap of trouble. I will be there to show you the tells that I see.
Oh, one other thing. No technician called the '87 crash bottom right. Not one. It is where I earned my healthy dislike of the technicals. The market never did anything these folks said it would do and many of them just disappeared. I expect this time will be no different.
Remember to check out Part 1, Part 2, Part 3 and Part 5 of the series!
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Cisco, Intel, IBM and Sun Microsystems. 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