Viewing the Cyclicals as a Trade, Despite the Pirates Selloff

A scary experience at a theme park shouldn't keep you off a ride that can be rewarding.
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I used to take the kids to

Disney World

(DIS) - Get Report

at the beginning of each year. (Four years ago, before school got in the way.) At the beginning of every year, the analysts would always upgrade the cyclicals as some sort of bizarre optimism seeped into the water at Wall and Broad.

Each year I would be closely monitoring the pricing of a vast number of commodities to see if price increases came through. They always did. (They never stuck, but more on that later.)

The trick would be to buy the cyclicals for this analyst upgrade cycle but get out of them before the companies actually reported and stunk up the joint. Small window.

The last time I took that January DIS vacation, some five years ago, I decided that I couldn't play this game again, that it was getting too difficult to thread the cyclical needle. But there was a super-long line at Small World in the Magic Kingdom, a line so long that it stretched to that phone bank you get to when you step off of Small World. My kids were at the age when Small World was positively psychedelic, so you can imagine how many times we had to go through.

Each time, we would get off and then get right back in line. Each time, I would check in.

Each time,

Alcoa

(AA) - Get Report

and

Reynolds

(RLM) - Get Report

and

Phelps Dodge

(PD) - Get Report

were up a half point more than the last time.

The stocks had ramped the previous week. I figured there would be profit-taking. But so many people had shorted the cyclicals to the buyers that many were panicking.

By the fourth time, I couldn't take it any more. I told my trader to take down 100,000 of each one of these stocks. Just buy 'em. When we finished the next trip through Small World, I bought calls on all of them.

I caught the peak, that frightening peak where you, yourself, top-ticked every one of these stocks. I created the peak. If you look at some 10-year charts, you can see right when I exited Small World.

By the time we had moved on to the line at the Pirates of the Caribbean after lunch, I was already down two points on virtually everything. One of the cyclicals had preannounced worse than expected numbers -- not even one that I was betting on.

By the time we had sailed through Pirates, a horrible, frightening trip that would cause nightmares for weeks, I knew the whole move was over and I would have to wait another year before these stocks saw these prices again. I had blown it. I was too eager. Outside the phone booth near the Tiki Birds, I blew out all of the positions down about four bucks. It was a multimillion-dollar loss, and it was my first and best loss of the year. That day marked a top in the group that was not revisited for many years. I was wrong to buy but right to sell.

It left a really bad taste in my mouth. It was why, two weeks ago, after a big CYC ramp to 600, I put some puts on for a quick trade, betting that the Pirates selloff would repeat. I caught a mini-selloff. But this time, the move seems to have more legs, and I blew out the puts for a smaller gain and have switched directions, buying cyclical weakness. I will, however, forever view the cyclicals as a trade. No matter what happens, these companies will never be

Ciscos

(CSCO) - Get Report

or

Microsofts

(MSFT) - Get Report

. But they can make you gobs of money if you time them right -- and tons of red ink if you time them wrong.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Cisco Systems and Microsoft, 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

letters@thestreet.com.