NEW YORK ( Real Money) -- Here's what happens next. The analysts, who have watched their high-multiple stocks get wrecked, soon won't be able to take it anymore. They'll get tired of the phone calls. Tired of playing defense. They won't want to be on the hook for BioMarin Pharma ( BMRN) -- notice the Goldman downgrade last night? -- or Concur Tech ( CNQR) or Isis Pharma ( ISIS). They know that the gains are going away and they simply can't take the pain.
So they'll downgrade.
At the same time, the short positions, which hadn't been that big, grew by leaps and bounds Monday and Friday -- so the base is in for the downgrades. We could get a combination of an aggressive wave of selling, plus some short-covering, and then some intraday upgrades that work. Not yet, though. We need to lose adherents in order to get bottoms.
Right now the analysts are panicked. They are trying to figure out what to say -- what could reverse the waves of selling. They realize now that they should have downgraded before. They know they missed the top. But they look at where the stocks have gone year over year, and they notice that they are still up on their recommendations and they figure: Why not pull them? There are no real catalysts that they can see that would turn these around.
This is all part of the bottoming process that we have seen time and again in the momentum stocks. At a certain point -- not until you get that action that comes from a knockdown by a downgrader -- comes a whoosh in which volume expands, clearing out all of the sellers of which to speak. Then the stock trades up to where it opened and then even higher, closing nicely in the black. That's the sequence. When that happens the next day? You get a gap up from the get-go as everyone seems to realize at once that the panic has occurred and the sellers are done.