The Market Whispers and a Trader Is Humbled

You have to listen to this market to understand what's going on with the cyclicals.
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When I used to teach trainees at

Goldman Sachs

on Friday nights, sometimes I would just go into a jag about what I saw in the markets, because sometimes the markets scream at you and people don't want to listen. Other times, the market whispers to you and if you try hard enough you can pick it up and understand.

If I were teaching this Friday night, I would lock the door, get a couple of pizzas and bear down on this thesis: The market's moves this week made a huge amount of sense. We better understand what it is saying, because it is both screaming and whispering at the same time. And if we miss it, we will not make any money.

Here's how I would start the class. Let's lay out what happened. The cyclicals ramped; the growth stocks got pummeled. Now, let's break it down. The drug stocks acted poorly and the technology stocks acted miserably and even the financials sold off.

Meanwhile, aerospace came back, as did heavy machinery.

Now let's drill down for some commonality. And let's explore a couple of important themes. I had just gotten out of law school, so I was still using that miserable Socratic method (vs. now, when I like to teach here like those great BarBri teachers who lectured you for the bar exam -- lawyers, you know who I mean, those crackerjack guys who cut right through the obfuscation).

What do the cyclical stocks that are moving have in common? For the most part, they have acted poorly since the twin catastrophes of East Asia and Brazil. (Losers.)

What do the stocks that are selling off have in common? For the most part, they have acted well since those global problems. (Winners.)

The winners, I believe, began to have too high a multiple on future earnings to be justified by this level of interest rates. The losers began to have too low a multiple on future earnings based on the increased level of certainty for future earnings, given that Japan and Brazil have started to turn and East Asia is getting better.

So we are seeing what is known as multiple compression for the winners and multiple expansion for the losers.

Or, put simply,

Alcoa

(AA) - Get Report

is the exact same company it was three weeks ago when it sold at 40. But the possibility of business getting better down the road has increased because of the foreign improvements, so people are more willing to pay more for those earnings than they would have been three weeks ago.

What changed? Between Alcoa and, say,

Sun Micro

(SUNW) - Get Report

? Frankly, the biggest change occurred during this earnings period. Sun, which is a fast-growing company, said it did not think it could continue to grow at the same pace. Alcoa, which is a slow-growing company, indicated that things could grow faster if there is global improvement. The market has chosen to believe both statements, and will continue to do so until either Sun makes people feel better about the future or Alcoa makes them feel worse.

(That does not mean that Alcoa might retreat. In fact, I thought

yesterday that Alcoa at 58 was too high. But Alcoa at 52, that is clearly better and getting close to where I would want in. Couple more points down, please!)

Now, what's the inconsistency in all of this? It's that technology stocks are cyclical, too, so they should trade in tandem with the big metal-bending cyclicals. Historically they have, in fact; they broke away from the cyclical pack only in the last few years. So, what has changed?

This is where

Jim Seymour's

thinking shines. The difference between

Cat

(CAT) - Get Report

and Sun might be Y2K. Investors have no Y2K fears with Alcoa or Cat. They are scared to death about Y2K and Sun. If Seymour didn't make you worry,

McNealy

from Sun sure has.

So, what do we see? A vicious rotation into stocks that do better if the world really is doing better (don't forget, rates should go up if that is the case, or at least not go down any more) and out of stocks that do worse if the world does better or might not do as well because of Y2K.

Amazing.

The market is so *^$*&$$* brilliant, you have to be humbled at its every move.

Random musings:

IBM

(IBM) - Get Report

continues to be an incredibly treacherous stock to own on options-expiration day. Remember last time, when

Morgan Stanley

made that negative call? Here it goes again, but I don't think Morgan will need to do anything to knock it down this time. It's happening all by itself.

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 the stocks mentioned, although holdings 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 an email to

letters@thestreet.com.