The Rally in Review

Cramer dissects yesterday's strength.
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Did you ever wonder where a rally comes from? If you had to deconstruct yesterday's rally -- pull it apart, analyze its pieces, spot its foundation -- what would you come up with?

For me, the rally started with the notion of the market being oversold. I have gone into this term many times in the archives, but it always seems to allude people. So let me this time graft on a sports analogy.

Let's take the hapless

Knicks

-

Spurs

NBA

Finals. San Antonio clearly dominated, but there were moments after New York fell behind where you could just feel they would fight their way back. It was illogical, especially if you thought the Spurs were going to win anyway, that the Knicks could mount a drive after letting the Spurs score, say, six straight baskets. Illogical, because at the very moment that the Knicks seemed the most out of it was precisely when they snapped back.

That was some of what occurred yesterday in the market. It had been pummeled six straight times. It had been counted out. But the buyers are pros as well, and they know that they can go to work and score some points when it looks most lopsided. In that sense, the psychology simply changed from dire to euphoria in a few short hours.

Secondly, we had a major analyst shift. When someone who has been a protracted bear on

Intel

(INTC) - Get Report

switches direction, that someone can break through a lot of negativity. Yesterday, Drew Peck, the noted

SG Cowen

chip analyst, did that with Intel.

Those of us who follow Peck, this manager included, know him as a thoughtful arbiter who is not easily swayed from one direction to another. I remember having dinner with him and my wife a decade ago at the

Palm

. My wife insisted I go out and have dinner with him because, as she said, "Drew has impact." The moment he switched I knew I was going to take stock. Impact players have to be obeyed.

(Contrast Peck with Barton Biggs. The

Morgan Stanley

analyst comes on TV almost to mock himself. He refuses to play the game. He even recoils from talking about keeping his powder dry. Because he doesn't want any powder. He doesn't even seem to want to do this business. And his constant disdain for the process of making money in the market lessens his impact dramatically.)

Third, we had relief overseas. It sure is debilitating every day when you come in and see on

Yahoo!

(YHOO)

all of those negatives in the world market summary. You can't cut through that gloom. But when you come in and those markets are smoking, you are inclined to look for bargains.

Fourth, cash does build. The market does renew itself. As long as funds come in, the market simply can't stay down because, in the end, it's driven by supply and demand just like everything else, and the public keeps creating demand with its dollars.

Finally, the fifth building block I saw was flow. Many of the sellers, particularly the futures sellers and

Nasdaq

booters, simply failed to re-enter orders when they saw the strength overseas. I know I wanted to buy a bunch of stocks that had been heavy just the day before. I went in preopening to see if any of the sellers were back. Of course, they saw the same things I saw and weren't about to continue to dump things.

Could they come back today? Sure. But I read enough negative articles about bear traps and phony rallies and dead-cat bounces (I have six cats, so don't harass me!) to give me hope that we could finish July on a strong note.

Random musings:

I stupidly did not reference

Red Hat

as a major reason for

Microsoft's

(MSFT) - Get Report

sluggishness, and I thank faithful reader B.L. for reminding me. I also have been taking these incredible

Jim Seymour

pieces for granted, including his excellent Red Hat

analysis. Darn, this stuff is good. ... Boy, is the Net ragged!

eBay

(EBAY) - Get Report

and

AOL

(AOL)

and

Amazon.com

(AMZN) - Get Report

are really giving us a triple tag team of pain, aren't they?

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long America Online and Intel. 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.