No Bottom Yet

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We got our first sign of capitulation in this market, and it was not pretty. Let's spend some time on it so you can recognize why I think it is so important.

As I mentioned all day Tuesday, the action in

Gap

(GPS) - Get Report

was defining action, telling the whole story for a sector and for the market at large. Gap is a darling of this market -- as it was a darling of the market in 1987 before the crash -- but on word that August may just be okay, it has plummeted from 64 to 47 in a straight line. In a few days.

It is one of the scariest drops of this particular era and it is so reminiscent of the decline in Gap ahead of the October '87 crash -- this stock led all others down first -- that many of us are glued to the action. Tuesday the selling got to be so great that we had a midday imbalance. At bottoms these are frequent. Customers want to get out so badly that they have to stop trading the stock until they can find buyers at a more reasonable level.

At the same time that Gap stopped trading, however, the market reversed, so all of the scare indications, some as low as 44, were for naught (in other words, it might have gone down another six points from where it was when it was halted!). The halt caused people to sit up and look at Gap to the point where buyers flooded in. But, in what is a sign that all is not well in retail, the buyers did not overwhelm the sellers and instead the stock did nothing.

This was bullish, in that the stock had more demand that the market-maker who halted the stock thought there was. But longer term it was bearish because in the end nobody really cared to take Gap back up to somewhere near the levels it was before the carnage. Throughout the day I saw capitulation in names like GPS, names that had been favorites, including

General Instrument

(GIC)

(see my

piece a month ago about how nobody cared about that great quarter)

US Air

(U) - Get Report

(a real darling of the bulls) and, of course,

America Online

(AOL)

, where the selling was as vicious as I have ever seen it.

Only AOL, which I am long, had a semblance of a bounce back. I know these were only sideshows to the main battle going on in the marketplace, but I want to see more washouts holding and then rallying before I want to sound the all-clear.

Yes, capitulation, and admittance of defeat, is necessary to get a good bottom. And, yes, I was shown a good deal of down-and-out merchandise today. But the problem was, in the cases of Gap and U, or in any of the brokerages where I saw big discounts, I don't have a clue about how the companies are really doing right now.

How can I take a swing at Gap until I am sure August was okay? How do I know U is holding up? Is that all the bad news from the brokerages that was on the tape? Bottoms can't happen in a vacuum. They happen when people have to sell stocks that we all know are good, but are out of favor. Not stocks that are just going down a lot.

See you on Squawk.

James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com.

At time of publication was long America Online, although positions 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 by sending a letter to TheStreet.com at

letters@thestreet.com.