Freefall markets can create tremendous opportunities. Take
today. The stock was strong from the get-go, even before
resignation. There were persistent buyers for the first minutes of buying, taking, taking, taking the stock.
I noted the buys and told Jeff that Sun was definitely an "up" stock today. I put it down on the list of stocks to buy if it came in today. Same with
, which started out strong, in a continuing pattern of the previous day, no doubt courtesy of the meeting that Gerstner held with analysts after the close.
Both stocks swooned during the mini-Rubin retracement. In SUNW's case, five quick points could have been made. In IBM, ten points were available. IF you were paying attention and knew that buyers wanted in badly.
In previous markets in previous years opportunities like these only existed in the nuttiest of stocks, the biggest short squeezes or the stocks that traded so thinly that no size could be bought.
Now these opportunities seem to occur daily. The Rubin resignation certainly exaggerated the opportunity, but I think we are all getting used to this kind of intraday volatility.
So, how do you take advantage of the dips and buy the best merchandise, the merchandise that can give you the biggest pop?
We have a couple of rules at
that have put us in good stead over the years. If we think the markets are being pulled down hard by the programs (selloffs that take down the good with the bad) and we want to bet that the roller coaster will swing right back up, we have identified three ways to bet on the merch most likely to rebound.
Our first method is to place a bet on a stock that was just upgraded that day by a major investment house. Let's say
National Gift Wrap and Box Company
to its buy list Wednesday morning, after having the stock rated a neutral for a long time.
National Gift might have opened up a buck or maybe two bucks and then swooned to unchanged during the Rubin mini-selloff. Right then you had to pounce, betting that the Merrill sales force will go out and call its clients saying, "here is a rare opportunity, we just pounded the table for the first time on National Gift and the stock isn't up."
As everyone flits from one direction to another on the Rubin news, you scoop down and establish a solid National Gift position that you get backstopped on by the Merrill sales force. Doesn't get any more powerful than that.
Secondly, you can take advantage of situations where good news just came out, as in the case of
, with its great quarter, or Sun which was telling analysts the quarter remains very on track.
Cisco was a bummer today. I was down to buy all I could at $116 during the Rubin selloff (which, by the way, wasn't as nasty as the trading after the last five bogus Rubin resignation rumors!) and got hit with nothing. Sun, though, gave you a phenomenal chance, as the big buyers just walked away when the Rubin news hit.
Finally, there is the Big News at the End of the Day gambit, where you know that some meeting is going to take place that will generate some good action. That was the case with IBM Wednesday, a stock which looked totally broken but rallied amazingly fast off the end of the
sell programs because of the specific good news Gerstner was going to spread.
All three of these methods share an incredibly powerful near-term catalyst that gives you the chance to get out almost whole if the market turns down and stays down.
Why is this lesson so important? Take the case of
. It was down a buck from the get-go, more than SUNW or Cisco or IBM at the opening. It then dropped a half during the Rubin saga. But nobody pushed DuPont and nobody had been buying DuPont before the market turned down. So there was nobody to take you out of your day trade if you didn't want to hang out with DuPont for more than a day.
The stock finished hideously at its low. Understand that I typically like to buy weakness when I am building a position, except in cases of these extreme, heavily program-oriented selloffs. For those I want to buy what was previously the strongest going into the downturn, even if it is not down! That way I have the best shot at a profitable trade.
(Please, check out
Best of Cramer for some of my other trading tips, if you are new to the site.)
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long DuPont, Cisco and IBM (National Gift Wrap is a private company owned by Cramer's father. It does not trade). 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