Let's Hope This Jumpy Market Takes the Stairs - TheStreet

Editor's Note: Jim Cramer's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published May 10, 2002 on RealMoney.

Stairstep vs. W. Keep those two images in your head over the next few days.

We need to see steps that go up out of this market, not just another straight line down from where we were, wiping out the whole gain we had the other day.

We have had our share of W rallies in the last two years. The reason we have them is because of the peculiar nature of the two competing buyers and sellers in this market: the hedge funds and the mutual funds.

Consider the way each thinks. The hedge funds take a trend and follow it to the hilt. Sometimes over the hilt! The smart-money trade for the last few weeks was to short the

Emulex

(EMLX)

-

Cisco

(CSCO) - Get Report

-

QLogic

(QLGC)

-

Brocade

(BRCD)

complex. They went down every day.

The mutual funds, on the other hand, don't know anything but to keep buying those stocks, except the funds that have gotten off the tech track, and are buying health maintenance, defense, safety and homebuilding issues.

When the market starts going up, and then fails to go down intraday, the hedge funds, only a few of which are schooled to take immense pain, all cover, particularly in the afternoon. That's what that last burst was near the close of Wednesday's trading.

They do that because, alas, the mutual funds only know how to react to their own flows, and when the public sees that Van Wagoner or Firsthand or any of those other gunner funds just had huge percentage gains, they stop pulling their money out and start putting it back in. (That's totally wrong, of course; they should be pulling out radically, selling into the rare bit of strength, as it were.)

Then, of course, the mutual funds immediately put the money to work because what do they know about trading? They have no sense that stocks have run too much in a day and they buy stocks with bases that are totally built on the chimerical short-covering of the hedge funds.

The hedge funds, knowing that nothing has really changed fundamentally with the possible exception of some improvement but no number bump at the perennially overvalued Cisco, then short the stocks right back to the mutual funds.

By the end of the day, the rally tails off into its W formation, unless there is more good news coming either from the economy or another Cisco.

Alas, there isn't another Cisco, and we revert to W.

That whole life cycle is precisely what has happened the last seven times we had these big one-day runs. They are why I hate big one-day runs. They borrow from the future and are false tells of the market's direction.

What do we really want? Very simple: a series of small but buildable moves such as the ones that took us from

Dow

3000 to Dow 10,000 without so much as anything other than some occasional serious bouts with profit-taking or disaster -- Asian crisis, Long Term Capital, WTC cataclysm.

We had similar moves in the

Nasdaq

from 1995 to 1998. (Anything after 1998 was just a huge short squeeze caused by online investors and mutual funds, in essence ganging up on hedge funds that were caught paying too much time to the fundamentals.)

Let's watch for stairs. If we don't see them, we will simply be back in the elevator shaft. Without the elevator.

Random musings:

My nomination for the firm least likely to get big investment banking fees from the myriad

WorldCom

(WCOM)

restructurings and deals as it struggles with its debt load? Why, it's CIBC, where the honest-as-the-day-is-long Tim Horan says in the

Journal

today, "I think there's an 80% to 90% chance they'll be bankrupt in the next few years." Holy cow! Don't the investment bankers pay the salaries of analysts at CIBC? No bonus for you, Mr. Horan, but certainly the Congressional Medal of Honesty. Coming right up. ... Roger Lowenstein and some guy from

Business Week

duke it out about my book in competing reviews today. Lowenstein nails me as someone with true introspection for what happened in the last few years. The

Business Week

article complains I have no introspection whatsoever. Read it -- you decide.

James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. At the time of publication, Cramer was long Cisco.

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