The Anatomy of a Fake-Out

Oil and retail signaled that yesterday's strong open wouldn't last.
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What turned yesterday, ostensibly a terrific session from the get-go, into another nightmarish decline in which people lost a lot of money? How did an up tape melt into a down tape so quickly? Let's peel apart yesterday's

show and see if we can't find the anatomy of a fake-out, which is what Monday really was.

First, the setting. Europe, led by Germany, was very strong, so strong in fact that from 3 to 6 a.m., all it did was gain strength. I watched it closely because I had an overriding feeling that, judging by the action in Europe, I wasn't "long enough."

One thing that's important to remember, however, is that Europe "has no legs." What may be working for Europe has as little impact on our market as I have ever seen in my trading career. For starters, there is a different currency, one that is no longer losing strength by the day. There is no glut of underwritings; a summer dearth is more like it. And they have an economy that is losing, not gaining, steam, so bonds aren't under pressure. Yep, it is diametrically in opposition to our soggy situation, where the economy is too hot and the underwritings too heavy.

Of course, the SPX futures were up from the moment I walked in. The futures have no mind of their own -- they're just reflective of the last piece of information, regardless of how our markets will ultimately trade. I have noted before that the overnight markets really don't make a lot of sense. Sometimes they are a good tell, but often they just get you juiced for something that is happening elsewhere that won't happen here. That was the case yesterday, because right after the opening bell there were more losers than gainers, signaling that the futures strength was probably misplaced.

Why were the futures such a crummy tell? Because they didn't take into account our bond market, which is bigger, more powerful, and much more dour than our stock market. We had a terrible bond market on Friday, just a shellacked one. Now rates are creeping back to levels that haven't been seen in 20 months. Rates are the competition to stocks. At certain points rates get so competitive people sell stocks for bonds. It would have been nice to see the bonds bounce up a bit (down in yield) after Friday's deadly session, but before 9 a.m. the bond futures were down another 10 ticks.

Ten ticks? Nothing to get excited or worried about? Wrong!!! I had been in a meeting yesterday for the first 30 minutes of the bond futures session and when I got out and saw them down 10 ticks I immediately tried to short as many stocks as I could. The only thing I was trying to buy was

Intel

(MSFT) - Get Report

, and I did that because I always buy Intel whenever

AMD

(AMD) - Get Report

makes any positive noises. If you have traded Intel anytime since 1989 you would recognize that AMD periodically makes a big splash introducing a new chip, and the press goes all gaga over it and Intel gets hit and AMD goes up and you buy Intel and short AMD and make good money. (Reminder: I have to do the latter half of that trade today.)

Why this is has to do with horse races and politicians. The press likes to make races out of races that don't exist -- Quayle, Alexander, etc. -- because it's better copy. AMD has never delivered anything. The guy who runs it is still running it. In theater this would be called vaudeville; but in our business it's called competition. Shame on the pressmeisters, but thanks for the uptick!

It wasn't just the bond futures, though.

MCI WorldCom

(WCOM)

has become the elephant in the room. Talk about a stock that is re-enacting last year's swoon pound for pound. Holy cow! Even those who love, love, love certain stocks hate a price war. Now we have a 5-cents-a-minute price war. Oh no, will Tweetie and Larry Bird be joking with Michael about this, much to the shareholders' chagrin? You knew that sucker was headed lower and it's a big part of the NDX. It can pull a lot of other stocks with it.

And then there was

eSlay

(EBAY) - Get Report

. Talk about a onetime darling gone wrong. An outage ahead of the big meeting to explain why there would be no more outages! Get the irony police on the horn, fast!! This stock has that scent that drug stocks emit after their crucial drug has just been rejected by the

FDA

. That is not an aroma. Someone go in there right now and clean it up. Let's draw straws to see who has to do it.

So the bonds, the Net, a loved OTC stock, they all contributed. Not even a subsequent rally in Intel -- based on a false rumor that the firm would preannounce (it is way too early in the quarter for that) -- and a momentary rally in

Cisco

(CSCO) - Get Report

ahead of earnings could change things. (Cisco later gave up the ghost ahead of earnings, exacerbating the decline.)

But what really scared people is the relentless selling in the once-popular retailers. I only own one of these,

J.C. Penney

(JCP) - Get Report

-- would you like to buy some from me? -- but this group has all the traction of a Pinto in quicksand. Monday was

Circuit City's

(CC) - Get Report

turn in the charnel house. Friday had been

Gap's

(GPS) - Get Report

. So had Thursday, for that matter. People own these stocks. They own them because they have seen lines in them. And because they have the hot products. This selloff hits home.

The retail decline is the most insidious of all because, unlike the situation at a lot of stocks that are going down, these companies are doing well. So now you have the there-is-nothing-wrong-with-these-stocks-but-they-are-going-down- anyway problem. That is fairly typical when you get an interest-rate backup. It is also fairly typical of when one or two mutual funds are selling. Usually right about now somebody gets to

Maria Bartiromo

and tells her that it is

Fidelity

that is selling -- Lord knows I have seen enough of those raids since Maria became the most important force in stocks since

Goldman Sachs

(GS) - Get Report

-- and then the selling stops. So look for that scenario today.

But the clincher? The reason you knew this day would be dashed? Oil and

oil service. When you see

Schlumberger

(SLB) - Get Report

and

Baker Hughes

(BHI)

and

Halliburton

(HAL) - Get Report

up, think zero-sum. These stocks rally at the expense of the rest of the market. You knew there was nothing sustainable going on.

So we went down. And in some cases went down hard. By the end of the day there were so many faked-out people that you knew today's session would start anemically.

Learn to spot that pattern where it looks great but there are no underpinnings. You will see it often as long as the bonds act poorly. And don't be faked out. It will cost you a lot more than the $10 a month it costs to read

TheStreet.com

.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Cisco, Goldman Sachs, Intel and J.C. Penney. 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.