(This piece tries to give you some daytrading tips as well as a perspective about what I look for each day. I am not a daytrader. But I do daytrade. Here's what works for me in a market break.)
Freefall markets can create tremendous opportunities.
(Normally, markets have no problem finding buyers and sellers. They match up rather well. But when a news event triggers huge selling in the S&P futures pit, and when regular equity holders want out all at once, that can produce momentary imbalances between buyer and seller. In this case, sellers overwhelmed buyers. There were people who might have wanted to sell something literally lower than where someone might have wanted to buy something. That's when the market is like a sky diver with no parachute.)
:Nasdaq) today. The stock was strong from the get-go, even before
resignation. There were persistent buyers for the first minutes of buying, taking, taking, taking the stock.
(On Wall Street, you don't buy a stock. You "take" it, as in "take the offering." You don't sell a stock, you "hit a bid." For you real estate types out there this must be very unnerving nomenclature. But take and bid are buy and sell in my world. The Rubin resignation was a classic buy on the news moment, because the markets righted themselves very fast. Don't take that too bullishly, though. This piece focuses just on that moment. I think, in retrospect, this week will be known as the week inflation started raging, and it raged without Rubin at the helm. Still, my point is that even if you are a bear, or thought the news bearish, events occurred so fast, and the declines were so swift, that it was "too late to sell" after the news hit the tape, and that you could only buy if you wanted to make a profit. What this piece tries to key in on is the notion of how to "scalp" a few points off the best buys in a free fall.)
I noted the buys and told Jeff that Sun was definitely an "up" stock today.
(Lots of people ask me how I knew this. Some wanted to know whether there was a screen that showed me it. Others wanted to know whether they can spot these patterns at home. I can't be very reassuring. I spot them in several ways. One is that I am "covered" or have salespeople from every firm on Wall Street calling on me. One of the people from each firm is an over-the-counter sales trader. Her job, specifically, is to show me merchandise that is for sale or to be bought, so I can get a better price if I am so inclined. Three of these salespeople had Sun Micro to buy. Why didn't I just go and buy Sun Micro because of that? You can't do that legally. That's front-running. You can't go and buy a stock because you hear others are buying it away. How will they catch you? That's not the point; it is an honor system. Believe me, you will be cut off from these "flow" calls very fast if you take stock ahead of market-makers working orders for customers. The salespeople who come in are hoping I will sell SunMicro to them, and they can offer me the best price because they are buyers.)
I put it down on the list of stocks to buy if it came in today.
(I always keep track of merchandise that is for sale or to buy. All good traders do. It's one of the reasons I believe that traders are great Black Jack and Bridge players. They remember everything that is shown or said to them. I write down the stocks people are buying in a note book to keep track of them. It comes in handy, as this piece shows.)
:NYSE), which started out strong, in a continuing pattern of the previous day, no doubt courtesy of the meeting that Gerstner held with analysts after the close.
(IBM trades on the New York Stock Exchange. Several "listed sales traders," or people who canvass accounts about buy and sell interests, told us that they had "size customer buyers," or large orders, for IBM. I wrote those down too.)
Both stocks swooned during the mini-Rubin retracement. In SUNW's case, five quick points could have been made. In IBM, ten points were available. IF you were paying attention and knew that buyers wanted in badly.
(These were trough to peak measurements. Meaning if you came in at the bottom, you could have made those amounts.)
In previous markets in previous years opportunities like these only existed in the nuttiest of stocks, the biggest short squeezes or the stocks that traded so thinly that no size could be bought.
(IBM had a 16-point move one day this week. That's incredible. I mean completely incredible. For years, unless some account was short a stock and had to cover, or bring the stock in, you rarely if ever saw such moves in a day from major stocks. A short squeeze takes a stock up artificially because the short-seller often has no choice but to cover or "fail to deliver the borrowed shares." That nightmare is thoroughly covered in the archives.)
Now these opportunities seem to occur daily. The Rubin resignation certainly exaggerated the opportunity, but I think we are all getting used to this kind of intraday volatility.
(We are seeing such radical moves in mainstream stocks, not just Net stocks. I know
wondered whether the IBM plus-16 thing wasn't some extraordinary blow-off signaling the end of all rationality. I have seen rationality end so many times these last two decades that I can no longer make such judgments.)
So, how do you take advantage of the dips and buy the best merchandise, the merchandise that can give you the biggest pop?
We have a couple of rules at
that have put us in good stead over the years. If we think the markets are being pulled down hard by the programs (selloffs that take down the good with the bad) and we want to bet that the roller coaster will swing right back up, we have identified three ways to bet on the merch most likely to rebound.
(Here's the daytrader stuff. It does not work in a tape like the one we had Friday, where bonds are so awful that they wreck all equities. It does work when you have an event that causes a quick capitulation, even though it does not involve rates.)
Our first method is to place a bet on a stock that was just upgraded that day by a major investment house. Let's say
:NYSE) had added
National Gift Wrap and Box Company
to its buy list Wednesday morning, after having the stock rated a neutral for a long time.
(We got a real live example of this on Friday, when
Salomon Smith Barney
upgraded its price target for
undefined. Jack Grubman, the analyst who raised the price target, is incredibly powerful. Had you bought this stock at the opening, during the freefall, you would have been able to sell it a point-and-a-half higher maybe 20 minutes later. But had you held on throughout the day, you would have lost money -- because ultimately the bonds trumped the stock market.)
National Gift might have opened up a buck or maybe two bucks and then swooned to unchanged during the Rubin mini-selloff. Right then you had to pounce, betting that the Merrill sales force will go out and call its clients saying, "here is a rare opportunity, we just pounded the table for the first time on National Gift and the stock isn't up."
(This sequence is precisely what happened to MCI Worldcom. Smith Barney people started loading the boat up after a few minutes of the stock being unchanged. And you had a chance to scalp a point.)
As everyone flits from one direction to another on the Rubin news, you scoop down and establish a solid National Gift position that you get backstopped on by the Merrill sales force. Doesn't get any more powerful than that.
(The backstop is key to daytrading. You want to be out at the end of the day. You want to make that point and be sure you can get out.)
Secondly, you can take advantage of situations where good news just came out, as in the case of
:Nasdaq), with its great quarter, or Sun which was telling analysts the quarter remains very on track.
Cisco was a bummer today. I was down to buy all I could at $116 during the Rubin selloff (which, by the way, wasn't as nasty as the trading after the last five bogus Rubin resignation rumors!) and got hit with nothing. Sun, though, gave you a phenomenal chance, as the big buyers just walked away when the Rubin news hit.
(Companies that just reported good news are kind of like companies with lead lining during a Kryptonite hail storm. The specific good news shields you from broader macro news that might affect other stocks. Cisco had so many buyers it didn't even go down that day, but it did crumble later in the week.)
Finally, there is the Big News at the End of the Day gambit, where you know that some meeting is going to take place that will generate some good action. That was the case with IBM Wednesday, a stock which looked totally broken but rallied amazingly fast off the end of the
sell programs because of the specific good news Gerstner was going to spread.
(This turned out to be the trade of a lifetime. IBM traded at $217 in the Rubin selloff, and a day later it was in the $240s. You had to use the weakness generated by the sell programs to get in, and, believe me, you would have gotten in without a problem using this method. We were able to grab 10,000 shares in the free fall and sell it up 20 later in the week!)
All three of these methods share an incredibly powerful near-term catalyst that gives you the chance to get out almost whole if the market turns down and stays down.
(The two keys to daytrading are answered here: good entrance point and sure-fire exit method. Everything else is just fine if you get these two things right.)
Why is this lesson so important? Take the case of
:NYSE). It was down a buck from the get-go, more than SUNW or Cisco or IBM at the opening. It then dropped a half during the Rubin saga. But nobody pushed DuPont and nobody had been buying DuPont before the market turned down. So there was nobody to take you out of your day trade if you didn't want to hang out with DuPont for more than a day.
(DuPont languished while these other stocks reversed. You can't buy a no-catalyst stock in a program and expect to make any money that day.)
The stock finished hideously at its low. Understand that I typically like to buy weakness when I am building a position, except in cases of these extreme, heavily program-oriented selloffs. For those I want to buy what was previously the strongest going into the downturn, even if it is not down! That way I have the best shot at a profitable trade.
(My investment style is very different from my trading style. When I am investing I look for weak stocks that I believe are near an inflection point that will make them turn around. I buy them down. When I am trading, I am trying to find the Sun Micros and IBMs, momentary weakness that will allow me to scalp back into strength. The reason is easy: I want big investment positions, bought on the way down at excellent prices. I want crackerjack trading positions that can make me two or three points rather quickly. I make money both ways and enjoy the process as much as ever!)
(Please, check out
Best of Cramer
for some of my other trading tips, if you are new to the site.)
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Cisco and DuPont. 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