Making a List, Checking It Twice

The market may be naughty and it may be nice. The trader reviews the signs that can help us judge.
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Can we bounce? Of course we can bounce. We need to see several things first though. Let's go over the real bounce vs. fake-out checklist.

    We need to see a severe decline in the number of bulls in the survey that comes out every Wednesday. We have had more than 50% bulls for so long that it makes one wonder who is left to come in and buy. We would like to see that number decline to under 45% bulls before we get a true rally. We need to see rates stop flirting with 6.25%. The only way to make sure that happens is to overshoot 6.25% and then work our way back to 6% after the economy definitively cools. Don't worry -- it can happen. Nothing wrong with waiting for it though. We have to see the underwriting calendar simply dry up. That means canceled deals, no secondaries, no inventory. Right now everybody has all the merchandise they need. In order to find room for additional merchandise, stock has to be sold. That's how you get a bottom. The advance-decline line has to get less crummy. That means stocks have to find a level where people don't want to sell them. Right now people want to sell stocks a lot more than they want to buy them. Consider the advance-decline line a plebiscite for or against the market. Right now the market is losing. We need to see more capitulation among the analysts. Other than that brokerage slam from Credit Suisse First Boston, all that has happened is that brokers have raised ratings for Net stocks. Wait until the cycle starts going the other way and we get downgrades. You don't get bottoms while this many people hang on. Take a look at the most recent sizable group bottom we had, the oil drillers. Almost every analyst had thrown in the towel by the time that selloff was over. No one has thrown in the towel on dot-com land. Mergers using cash have to take place, reducing the supply of stock on hand. This great bull market has been fueled by a decline in shares, not an increase. But we aren't seeing much withdrawal of stock right now. We are seeing a huge Net issuance. The dollar has to stabilize. I think this can't happen until the Fed raises rates. Why do we care about the dollar? Because we need foreigners to come in and help us buy up some of this supply. Shorts have to get puts in abundance. There are not enough people betting against the market in puts or shorts. Wait until you see very high put/call ratios before you pounce too big. There has not been enough pain yet. I know this sounds ridiculous, but people haven't really had substantial losses yet. You didn't get a bottom last year until lots of players were cashiered. You haven't seen the declines on the front page of The New York Times. This is my favorite indicator. You don't get a serious bottom until the upper right hand corner of the front page of the Times trumpets the selloff. Everything else is just child's play.

All other attempts to call a bottom will be strictly for a trade. The trades, like the run that

Inktomi

(INKT)

had from $87 to $105 in one session, might be worth grabbing for the nimble. But most of you out there don't play that game. (Shocking, but the average

TSC

reader is not a daytrader, he just happens to trade more than others.) I do. It is not easy and I sure hope you don't quit your day job now to try it.

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.