Even Worst-Case Scenarios Reinforce the Cyclical Trend

Cramer offers more reasons to like cyclical stocks now.
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The beginning of the month, with its massive

S&P

commitments -- the spike in the last hour -- can be a nasty head fake some time. This whole 1,000-point rally had its underpinnings on a benign payroll number one month ago.

But now another payroll number awaits us. If it is too strong, what happens? Will the rally be wiped away?

Let me give you a worst-case scenario. Rates move up to six, and all of the weak-handed stocks -- drugs, Nets, high-multiple techs and financials -- all just get clobbered. The cyclicals initially get hurt and then rally on a sign that the economy is maintaining strength.

Yes, the worst-case scenario just reinforces the new trend. A not-hot payroll number leads to good news for every stock and the chance for a run to 12,000.

So, given those extremes, again, I come back to liking these cyclicals. What's the risk to them? Ironically, it's earnings. These stocks have moved up so much that they are no longer cheap on 1999 or 2000 earnings. If you get bad numbers from these guys, they will be crushed.

Again, however, there is good news. We just had the quarterly reporting period. The loser cyclicals won't even bother to preannounce for another six weeks. That's six weeks of party time.

For me, I am maintaining my best Nets, in reduced fashion, and praying that cyclicals come in. To show you my hand, for example, I am hoping that

DLJ's

downgrade of

Halliburton

(HAL) - Get Report

causes selling in that stock. I will buy it. That's the kind of stock that works in a cyclical rally, as it has engineering and construction and leverage to the new, higher oil prices.

Last night, when I was uptown, everybody I bumped into was long the same Net stocks. The look on their faces was abject -- like they were down on the stocks or something. They're prototype weak holders. All I can say is that to every time there is a season, and right now the season is cyclical. But the weather changes real fast around here. It will change back when the newly downcast weak holders and the 2-cents-a-share-cost-basis crowd are done with their Net selling.

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 the stocks mentioned, although holdings can 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

letters@thestreet.com.