We are seeing the fruits of a failed strategy that many hedge funds put on. Unwilling to sell their highflying tech, they hedged it by shorting the
. (They couldn't short the
because it was too volatile). That's how
could rally viciously. That's how the drugs zoomed. That's the rally behind
Here's how it works. People sell S&P calls when they are rich, or have a lot of premium, to hedge their exposure to the market.
Many of the hedgers use that index because it is the most liquid.
But the hedge didn't work. The collapse came in tech. The S&P hedge had to be brought in or covered. When the hedgers came in to cover, their frantic buying was so powerful it moved the underlying stocks that make up the index. Sellers didn't even have time to register their sales, the move was so fast.
That's why it was totally logical that the
would rally and the NDX would fail. They went in tandem. And the higher that the S&P went up the more urgent it was to take the short off before it wiped out your tech gains.
A recipe for disaster for new tech holders that served to put some life in the old stocks and out a nifty floor on the
Dow Jones Average
. And we wonder why I keep stressing that you have to take something off the table.
: Join me at 5:00 p.m., when I will discuss this and other issues on my
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. 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