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Cramer's Rewrite of His 'The Anatomy of a Fake-Out' Column

At week's end, the trader concludes that rates are all that matter these days.
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Here's a piece that's back by popular request. People urged me to do this as a way to flesh out my day. So here goes.

What turned yesterday, ostensibly a terrific session from the get-go, into another nightmarish decline in which people lost a lot of money? How did an up tape melt into a down tape so quickly? Let's peel apart yesterday's show and see if we can't find the anatomy of a fake-out, which is what Monday really was.

(This market wanted to go higher, but not until it was sure the bond auction was out of the way and the

Producer Price Index

had no surprises. The session described here made a lot of people very bearish. It also brought out a lot of short-selling because it left the market with little hope that things could get better. That was wrong in retrospect.)

First, the setting. Europe, led by Germany, was very strong, so strong in fact that from 3 to 6 a.m., all it did was gain strength. I watched it closely because I had an overriding feeling that, judging by the action in Europe, I wasn't "long enough."

(So often when I drag myself in each morning between 4:15 and 5:15 I see Europe going great guns and I think to myself, oh darn, people are going to bid the market up and it won't hold. I worry about fake-outs because I like a market that allows you to get in and I hate a market that puts on its whole move right at the opening. I saw from the European markets that we would have one of those hated tapes because all morning I would hear, read and feel that if Europe went up 1.5%, we will go up 1.5% because we are all connected.)

One thing that's important to remember, however, is that Europe "has no legs." What may be working for Europe has as little impact on our market as I have ever seen in my trading career. For starters, there is a different currency, one that is no longer losing strength by the day. There is no glut of underwritings; a summer dearth is more like it. And they have an economy that is losing, not gaining, steam, so bonds aren't under pressure. Yep, it is diametrically in opposition to our soggy situation, where the economy is too hot and the underwritings too heavy.

(Our market is trading on supply and demand right now. When there are a lot of underwritings and bond auctions going on simultaneously, we can't absorb the supply, and prices head lower to find a level of equilibrium. It is just like that Econ 101 class that you may have taken. Europe, however, has no glut of new issues and isnt suffering from massive bond supply. So what happens there doesn't really impact here. In fact, what could be good for Europe -- a strong euro, might be BAD for the U.S. as foreigners might want to dump our dollar-denominated stocks to put money back in their own currencies. I believe that played a role earlier in the week.)

Of course, the SPX futures were up from the moment I walked in. The futures have no mind of their own -- they're just reflective of the last piece of information, regardless of how our markets will ultimately trade. I have noted before that the overnight markets really don't make a lot of sense. Sometimes they are a good tell, but often they just get you juiced for something that is happening elsewhere that won't happen here. That was the case yesterday, because right after the opening bell there were more losers than gainers, signaling that the futures strength was probably misplaced.

(These futures this week sometimes mirrored London tick for tick. For several days this week when London was down 60, the futures were off 6.00 and when London would rally down 30 the futures would rally to down 3.00. Pretty stupid, huh? Well it happens. The futures must be taken with a grain of salt. Don't bite when you hear the futures are signaling something big when you turn on the TV or come to work. Once the real players come in and place bets showing that we are not the United States of Europe, rationality prevails and you get a better weather report.)

Why were the futures such a crummy tell? Because they didn't take into account our bond market, which is bigger, more powerful, and much more dour than our stock market. We had a terrible bond market on Friday, just a shellacked one. Now rates are creeping back to levels that haven't been seen in 20 months. Rates are the competition to stocks. At certain points rates get so competitive people sell stocks for bonds. It would have been nice to see the bonds bounce up a bit (down in yield) after Friday's deadly session, but before 9 a.m. the bond futures were down another 10 ticks.

(The market is hostage to rates right now. As long as rates trended up, this market was destined to look horrible. But the PPI gave everybody the green light and removed bonds as a factor, allowing stocks to climb. How important are bonds? Think of it like this. Did anybody report anything, earnings-wise on Friday to make the stock market jump? Did Intel (INTC) - Get Free Report -- which I am long -- say something? Did any analyst change his view? Did more money suddenly get pumped into the market? Nah, it was all rates, that's all that mattered.)

Ten ticks? Nothing to get excited or worried about? Wrong!!! I had been in a meeting yesterday for the first 30 minutes of the bond futures session and when I got out and saw them down 10 ticks I immediately tried to short as many stocks as I could. The only thing I was trying to buy was Intel, and I did that because I always buy Intel whenever


(AMD) - Get Free Report

makes any positive noises. If you have traded Intel anytime since 1989 you would recognize that AMD periodically makes a big splash introducing a new chip, and the press goes all gaga over it and Intel gets hit and AMD goes up and you buy Intel and short AMD and make good money. (Reminder: I have to do the latter half of that trade today.)

(I never put the AMD out, but boy was that what looks to be the last great pause for Intel. It was off to the races for the rest of the week after the AMD announcement. I am sick of AMD. I never want to read another word about it. It is simply NOT A FACTOR.)

Why this is has to do with horse races and politicians. The press likes to make races out of races that don't exist -- Quayle, Alexander, etc. -- because it's better copy. AMD has never delivered anything. The guy who runs it is still running it. In theater this would be called vaudeville; but in our business it's called competition. Shame on the pressmeisters, but thanks for the uptick!

(You need an uptick, or a sale higher than the last, to short a stock. You need positives to have buyers that will pay higher. I was being facetious here, but nonetheless it was an opportunity to bet against AMD.)

It wasn't just the bond futures, though.

MCI WorldCom


has become the elephant in the room. Talk about a stock that is re-enacting last year's swoon pound-for-pound. Holy cow! Even those who love, love, love certain stocks hate a price war. Now we have a 5-cents-a-minute price war. Oh no, will Tweetie and Larry Bird be joking with Michael about this, much to the shareholders' chagrin? You knew that sucker was headed lower and it's a big part of the


. It can pull a lot of other stocks with it.

(Of course, by the end of the week this stock got so low that I got reinvolved in it. Enough is enough. It has been severely punished for its bad quarter. Now the news could get better and with rates lower, this big interest-rate play could get some traction.)

And then there was


(EBAY) - Get Free Report

. Talk about a onetime darling gone wrong. An outage ahead of the big meeting to explain why there would be no more outages! Get the irony police on the horn, fast!! This stock has that scent that drug stocks emit after their crucial drug has just been rejected by the


. That is not an aroma. Someone go in there right now and clean it up. Let's draw straws to see who has to do it.

(eBay scares me still. This one looks like it will go up -- until the next outage!! The Net bounced, but old tech stayed where the action was and will continue to do so next week, I believe.)

So the bonds, the Net, a loved OTC stock, they all contributed. Not even a subsequent rally in Intel -- based on a false rumor that the firm would preannounce (it is way too early in the quarter for that) -- and a momentary rally in


(CSCO) - Get Free Report

ahead of earnings could change things. (Cisco later gave up the ghost ahead of earnings, exacerbating the decline.)

(Cisco's decline was a false tell. It was a beautiful quarter and it got things ready for a nice tech rally.)

But what really scared people is the relentless selling in the once-popular retailers. I only own one of these,

J.C. Penney

(JCP) - Get Free Report

-- would you like to buy some from me? -- but this group has all the traction of a Pinto in quicksand. Monday was

Circuit City's

(CC) - Get Free Report

turn in the charnel house. Friday had been


(GPS) - Get Free Report

. So had Thursday, for that matter. People own these stocks. They own them because they have seen lines in them. And because they have the hot products. This selloff hits home.

(Again, when people saw that retail sales slowed, that was the signal to buy retail. Counterintuitive? No, if retail slows, the Fed doesn't have to put on the brakes and it can rally again. That's what we want to see. The bonds took these stocks even higher. I found myself long some Gap August 40 calls by week's end because I think that stock can now go higher in a benign interest-rate environment. I sold no Penney.)

The retail decline is the most insidious of all because, unlike the situation at a lot of stocks that are going down, these companies are doing well. So now you have the there-is-nothing-wrong-with-these-stocks-but-they-are-going-down-anyway problem. That is fairly typical when you get an interest-rate backup. It is also fairly typical of when one or two mutual funds are selling. Usually right about now somebody gets to

Maria Bartiromo

and tells her that it is


that is selling -- Lord knows I have seen enough of those raids since Maria became the most important force in stocks since

Goldman Sachs

(GS) - Get Free Report

-- and then the selling stops. So look for that scenario today.

(We were spared this claptrap this week, thank heavens.).

But the clincher? The reason you knew this day would be dashed? Oil and oil service. When you see


(SLB) - Get Free Report


Baker Hughes




(HAL) - Get Free Report

up, think zero-sum. These stocks rally at the expense of the rest of the market. You knew there was nothing sustainable going on.

(This was a rally that would not quit until Friday, when even as oil continued to climb, these stocks sold off. These lead crude, so maybe something is happening that at last will be negative for oil. That would be my hope.)

So we went down. And in some cases went down hard. By the end of the day there were so many faked-out people that you knew today's session would start anemically.

Learn to spot that pattern where it looks great but there are no underpinnings. You will see it often as long as the bonds act poorly. And don't be faked out. It will cost you a lot more than the $10 a month it costs to read


(Take away: Rates are the most important determinant. Much more important at times than earnings. This is one of those times.)

James J. Cramer is manager of a hedge fund and co-founder of At time of the original piece's publication, his fund was long Cisco, Goldman Sachs, Intel and J.C. Penney. At the time of this rewrite, his fund was also long Gap, MCI WorldCom and Microsoft. 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