Falling Into the Gap

The popular clothing retailer isn't just a good barometer of fashion: It's a good indication of where the market's heading.
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Everyone has certain stocks that can cause discomfort when they go down. For me, it has always been Gap (GPS) - Get Report. I love the Gap. I am wearing nothing but Gap today, and except when I am going to a business meeting, I don't have much use for any other clothes. (I am including Banana Republic.)

I love it when Gap goes up because it is a great barometer of the consumer. I have also found, however, that when Gap gets rocked, the market can't be far behind.

In the three big downturns of the past 15 years -- 1987, 1990 and 1994 -- Gap was uncanny in its predictive value, going down well in advance of the selloffs. It has been a perfect lead indicator. If you sold the market when it broke, you avoided some hefty losses.

It did not predict the quick downturns in 1997 or 1998, but those turned out to be fantastic opportunities to buy. One could argue that if it

weren't

going down, you should be buying the market!

How much do I value stuff like this? In 1987, I was long Gap big and got blown out in the last week in August. The decline was so striking I remember the trade, executed on the phone in Southampton, while I was trying to enjoy a vacation with my wife. The severity of the decline was breathtaking. Maybe that's why it stays on my screen as a warning even when I am not long it.

It is a piece of the puzzle. No more than that. But no less. It does keep me from thinking that I have to take a big swing when I don't have anything to go on. That's enough.

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

jjcletters@thestreet.com.