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Reviewing Wednesday's Rally

Cramer breaks down the action of yesterday's comeback.

What causes a rally? Where does it come from? Is it a given? Can we spot the next one if we saw the last one coming? These are the questions days like yesterday pose.

A rally, of course, is kind of like a World War II battle: It is the sum total of hundreds of small unit fights, with a backdrop of superiority of men and materiel vs. the other side.

(When I invoke a military analogy, please understand that I do so just because it is one of the ways to make things clearer. I like to use sports, I like to use movies, I like to use anything that can help you understand. No value judgments -- clarity is the goal.)

Yesterday's rally was pure D-Day, Omaha Beach. You really didn't know which way things were going to go initially. In fact, things looked terrible for the bulls. A terrible start in equities, with Net and growth stocks looking weak and cyclicals taking the day off, certainly gave no sign that things were about to turn.

In fact, the action in a handful of Net stocks, including

America Online







, made it look like disaster beckoned.

But there was one signal yesterday -- kind of like air power, if we are

Private Ryan

-izing this tape: the bonds wouldn't quit. Bulls dominated the bonds yesterday, resisting powerful forces that seemed bent on taking the 30-year bellwether to the dreaded 6% level, where many pros think stocks get sold and bonds get bought.

Ironically, the macro numbers weren't that supportive of a case for bonds (the only case is economic weakness or moderate growth with no inflation). For example, we pored over the

Beige Book, the


monthly binder on economic activity, and I can't say we saw evidence that things had gotten weaker.

At the time the Beige Book came out, bonds were up modestly for the day, but after devouring its contents, the bond-market buyers pronounced it benign and came in.

For me, I watched the trading both in the bond futures and in the cash market, the actual bazaar where bonds were traded.

Jeff Berkowitz

and I watched these so closely for signals yesterday that we actually got into a dispute at the 93 15/32-plus level on the on-the-run 30-year bond. I told him that he should stop looking at the futures, which I think were too dominated by bears trying to press an agenda downward (up in rates), and watch the cash market, which kept ticking up. (As a longtime trader of bonds, I like to stay focused on both.)


The point here is that you could not spot this particular rally coming from watching the flow or the price in stocks. The bonds gave the signal that it was OK to buy some of the neglected drug and slow-mo stocks, and to abandon, for a moment, cyclicals that have had too much of a run.

For example, take the action in


(MMM) - Get 3M Company Report

, a classic cyclical that got downgraded yesterday on price by a major Wall Street firm. It opened higher. That opening was wrong! It drifted lower and then started selling off more aggressively after the bonds showed a convincing rally.


(PFE) - Get Pfizer Inc. Report

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, on the other hand, traded lower from the get-go. I know I even pondered buying puts on the once-powerful stock if the bonds failed to hold. But I knew that if the bonds advanced I would take a beating, so I later dismissed the idea. Good thinking -- it would have been a major loss.

All of the big shifts in these two important stocks were "told" by the bonds ahead of time.

Some of the switches yesterday were exacerbated by research calls. Pfizer, for instance, benefited from a late-day call from

NationsBanc Montgomery

saying that maybe the drugs are not as bad as we thought. Montgomery has credibility on the issue -- it was negative when others were positive -- so its boost bolstered the case for Pfizer.

Merrill Lynch

saved AOL.

This stock looked terminal. I can't believe the amount of shelling this stock took at the 117-120 level. If you even came near that level with a limit, you got whacked by it.

But the selling dried up when Merrill's Net analysis, Henry Blodget, had Bob Pittman from AOL walk nervous holders and potential buyers through the bull case on cable access. Pittman's calm demeanor reminded me of a soothing general telling his troops not to worry, the win will soon be at hand.

The troops bought it. They took the

DOT, the closely followed Net index, with them. When the DOT reversed course and went positive after the beating it had taken, that emboldened buyers in the



, the pricelines and the deals that had come public within the last few weeks.

Others weren't so clear. A massive seller of Yahoo! got to 150 on the stock and didn't appear to be going lower. A tremendous seller of


(CSCO) - Get Cisco Systems, Inc. Report

at the 105 level disappeared when the bonds showed their bullish hand. Meanwhile, the selloff in the chemicals accelerated throughout the day, vindicating and verifying the trend change.

Last to change -- and some would debate whether they have changed at all -- were the financials. Here the

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

deal seemed to weigh heavily on the market. For example,

Morgan Stanley Dean Witter


got upgraded yesterday and opened strong, only to be tagged badly as Goldman kept going lower.

When Goldman stabilized at the 67 level, not coincidentally at the same time the bonds put in their bottom, Morgan ramped. The bank index firmed. But not all banks rallied -- too much overhang.

The amazing thing about this battle is its lack of resolution. It will play out again today. There is very little that will necessarily be carried over from yesterday, because the catalyst, the bonds, will be buffeted by the employment number tomorrow.

So D-Day gets played again and again.

Which is what makes this history lesson all the more compelling.

Random musings:

I would like to rewrite this piece for the weekend, as I think it captures the big issues and I'd like the chance to put some cordite smell into the darn thing. OK?

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long America Online, Cisco, Goldman Sachs and Yahoo!, 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 at As originally published, this story contained an error. Please see

Corrections and Clarifications.