If one more talking head comes on CNBC this week and recommends swapping out of big cap stocks into small ones, I'm going to throw the television through the window.
Every year at Thanksgiving, like clockwork, we're inundated with a cycle of stories about how investors are about to migrate out of whatever they like into something they don't like. Now, the rotator's fantasy is that the smart money will collectively swap Intel, Microsoft, and IBM for Intelligent Electronics, Microchip, and BMC Software.
Not gonna happen. They can talk all they want; they can write as many stories as they would like, this migration is simply not going to occur. Here's why: Seven months ago, when mutual fund managers were cruising along in small caps, daily beating the crap out of the market makers as they took them up by three or four points a session, every small cap buyer looked like a genius. All of the small cap funds were crushing the large cap guys and money was pouring in hourly.
But in July, the world came to an end. A combination of massive insider selling, a few earnings disappointments, and an endless deal calendar led to one of the great small cap routs in history. You may have suffered the pain through your IRA or 401K. Believe me, as someone in the trenches, your loss seems vicarious. I don't think I will ever forget having to pick up trading wires (usually my traders do that) and beg¿yes, beg--market makers in small cap Nasdaq stocks to help me liquidate some of these former high fliers.
I usually like to use real names, but the horror of those days is still with everyone, so let's just say that I had to threaten people with tales of pulling wires and closing accounts in order to sell 30,000 shares of a stock that I had bought 20 points ago the previous week. I got no help, despite the threats. And when the stocks were down so much that I could only buy, nobody would sell me them, either because there was no stock available, or because the market was so chaotic that real sellers couldn't be found.
In short, the exit was just way to small, the entrance back even smaller. No one wants to revisit that world any time soon. It's simply too fresh in all of our memories. (Contrast this, of course, with my ability to buy or sell 100,000 shares of Intel on the line with a half-dozen market-makers, with no threats to the firstborn and no checking under my car for bombs.)
I'm not totally writing off the small cap movement. I'm a big January-effect kind of guy. But, the pain of the summer is still very much with me, and with many others of my ilk. I know where all the exits are in IBM or Microsoft. I can find them in smoke. I can find them in fire. And they aren't padlocked when I get there.
James Cramer is a hedge fund manager and co-chairman of The Street. Of the stocks mentioned in this article, he has significant positions in Intel, Microsoft, and IBM.