Spotting a market bottom is no easy affair

If you think stocks have been faltering because of earnings shortfalls, think again.

By Jim Cramer Apr 16, 2014 12:18PM

Stock graph © y-studio/Getty ImagesWe all want to think we can spot bottoms. We all want to think bottoms aren't lockstep affairs but rather movements that take time to build. You get some confidence here, some short-covering there, some positive news from the left and some upgrades from the right.


But none of that happened Tuesday. Nope, it was all one gigantic two-stepped algorithm, and we should just suspend any judgment that there was more to it than that.


TheStreet.com logoThe first step? At 12:58 p.m. EDT the NYSE Arca Biotech Index, which had been in slow-motion-crash mode, made a sudden pivot and rallied convincingly. Don't bother looking, as nothing happened at that moment -- nothing at all. I checked the headlines of every single major biotech stock before I wrote this. There wasn't a single story of any import.


Then, at almost exactly 1:02 p.m., the Nasdaq Composite and the S&P 500 both bottomed simultaneously, seemingly within a few seconds of each other. No doubt that's a lifetime in the algo high-speed world, but I don't think our eyes could discern much difference.


After that, it was off to the races and the market never looked back.


As I scanned the headlines for anything that could have caused that pivot, I couldn't find anything of true import.


However, if you examine the trading in the iShares Barclays 20+ Year Treasury Bond (TLT), you'll see it peaked at 1:01 p.m., approximately one minute before the S&P and the Nasdaq bottomed.


So the sequence: At 12:58 p.m. the biotech index stops going down. At 1:01 p.m., bonds peak for the day. At 1:02 p.m., the S&P and the Nasdaq pivot and roar.


There can be no denying that sequence. It's right there in the numbers.


After that, there's one thing that sticks out among a sea of nothingness: a Twitter (TWTRpost at 1:10 p.m. from Daniel Graf, a man acknowledged as one of the geniuses behind Google (GOOG) Maps. It read simply, "Followed Maps to find that the flock was just around the corner - excited to take wing with the @twitter product team." Or, in non-Twitter English, a real hot-shot developer had just left the so-called hottest company in the space to become the vice president of the consumer product group at Twitter.


At that point Twitter shares accelerated their gains more quickly than did all of the other social, mobile and cloud-computing stocks -- which had already been rallying. Twitter never looked back, traveling from $41.14 at 1:11 a.m. straight up to $45.52 at the close -- the most vicious of all the ralliers from the ne'er-do-well crowd of both tech and biotech.


I only point this one out because Twitter had been the weakest in the cohort. It was certainly the most "shortable" name -- because, until Monday, we had thought that billions of dollars in insider selling would be coming in Twitter. We learned that holders responsible for the vast plurality of stock would not be selling any time soon, and when that happened, it took away the potential supply that would be needed to handle the massive short position that had been developing.


Do not minimize the significance of that announcement. Forty-five million shares, or 40 percent of the current float of Twitter, are sold short. The non-sellers, co-founders Evan Williams and Jack Dorsey, control 9.4 percent and 4 percent, while Dick Costolo owns 1.4 percent. Benchmark, the key venture capitalist, has a 5.4 percent stake. Together that's 20.2 percent of the locked-up stock. You also have to believe that those four shareholders are powerful enough to intimidate others not to sell. That means the short position is way too big for the float on any good news, like an acceleration in sales or earnings -- which are distinct possibilities.


Given the vociferous way this stock traded after the Graf announcement, lots of people were led to believe that we had just experienced a Twitter-led rally -- that the market had a new leader that had previously been the biggest decliner of this ugly era, a stock that had decline 30 percent for the year. People thought that this rally signaled, "Enough is enough." But I think we saw one of those "enough is enough" rallies just last week, so I am not going to be so sanguine.


Nonetheless, this move at least felt as if it had a bit of news associated with it. It also coincided with the possibility that interest rates on the 10-year Treasury may have troughed at about 2.5 percent.


In any case, let's go back to that bottom in the stock market. This much is clear from the sequence: Two minutes before 1 p.m., forced selling ended, regardless of the price level.

What happened at that time? That was really the last safe moment you had to beat the margin clerks who would otherwise margin you out or sell your stuff for you at any price they wanted, so they'd be able to ensure that you wouldn't stiff them.


It isn't clear how the bond peak fits in. It's possible the shorts and high-frequency traders all know the sellers' game plans. That's easy enough to discern. You probably wouldn't get as strong a pivot at that hour off the margin action without the bonds.


Maybe the whole thing is coincidence -- although you would have to be a complete moron to believe that.


So if we put it all together, we can conclude several things. First, the damaged flailing sellers were being margined out first in their biotechs, and then in their techs. Second, the buyers knew this, and they also were attuned to the peak in bond prices.


Third, money flowed out of stocks and into bonds until two minutes after the bottom in the biotechs. Fourth, that whole process reversed at the bottom in the Nasdaq and the S&P. Fifth, everything accelerated to the upside when the Twitter news broke.


Or in other words, the whole thing was dreadfully artificial and entirely done by a combination of "break the sellers" margin call and short-selling and HTF pressure, no doubt encouraged by the rally in the bond proxy TLT. Once the sellers were broken, the process was free to reverse.


We have no idea if the sellers are done. They tend to come in when the market lifts, as soon as they think there's enough cushion. Again, that's typical of the way margin clerks work. They want to try letting the bids build before they slice through them. But once the process starts, it doesn't stop until 1 p.m.


My conclusion: If you think for even one second that this sell-off has been motivated by earnings shortfalls, think again. That's not just because all the major stocks that have reported, save JPMorgan Chase (JPM), have announced much-better-than-expected earnings.


It's all artifice.


That's why it is so darned hard to make a judgment as to whether the selling, at last, is complete.


Jim Cramer


Jim Cramer's Action Alerts Plus: Check out this charitable trust portfolio for the stocks Cramer thinks could be winners. The portfolio is long GOOG and JPM.




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66Comments
Apr 16, 2014 12:41PM
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We're dealing with a system full of trillions of dollars that were literally conjured out of thin air.  As long as this charade is in play, there is no bottom.
Apr 16, 2014 2:34PM
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The last time I picked a bottom, it was hairy and white and cost me $200.

Sincerely,
Barney Frank
Apr 16, 2014 2:35PM
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"Former New York Mayor Michael Bloomberg announced Wednesday that he plans to spend $50 million this year on a new group that will mix campaign contributions with field operations aimed at pulling 1 million gun-control supporters to the polls, adding a new dimension to his long-running fight for tighter firearms regulation."

 

Maybe this idiot should visit Chicago like the FBI did to see how well tough gun control laws work. God, how do these idiots even get their shoes on the correct feet.

Apr 16, 2014 12:55PM
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For those who don't speak cramergibberish here is the translation:

"I predicted blue skies one day and dark clouds the next ...then I repeated that process daily so I could always point back and say I made the right call during the April rally/decline ....today I don't have clue so went with one my gobbledegook essays that says absolutely nothing. You are most welcome ...now give me some money"

Jim "madoff lite" Cramer
Apr 16, 2014 2:07PM
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I'm just going to go on record and state that maybe James T. Cramer may be correct...


According to my records and charts, this may be a mediocre week and within a couple weeks we will see the next leg up....Unless we have some terrible earning surprises..

That would give me a 10-20 day window, which is a lot of leeway...

Apr 16, 2014 3:20PM
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China ,what about the USA growth .Where is this big boom in America?
Apr 16, 2014 3:19PM
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These aren't even markets anymore; they are bad shows. And the fed and its banks are the script writers and the actors. It's "The Market Show", starring Yellen and her band of banking fools. We know the boring, repetitive storyline: more debt, bail out the banks at the expense of everything else, and keep pumping stock prices. They are playing re-runs right now, but congress has already renewed the show for next season. Be sure to tune-in and see your favorite ugly banker.

Apr 16, 2014 12:24PM
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isn't what we just went thru the past few days just a correction? 

 

"there is no bottom".

 

stocks were just on sale

Apr 16, 2014 2:44PM
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Little Beav can pick a bottom for you Bobo......... but it will be on a sheep.
Apr 16, 2014 2:41PM
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V_L......I'm really starting to think you should Produce, Write and Direct a "new" Outer Limits show..


Or re-vitalize a new "Twilight Zone" series...

Apr 16, 2014 2:33PM
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by the looks of things today, the "bottom" was yesterday? 
Apr 16, 2014 3:03PM
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If our Government just keeps the spending going.....Things will be just fine! Oh, did you hear that our Government is getting ready to spend 83 billion for the city of Detroit Union retirement fund due to the fact that it is bankrupt?
Apr 16, 2014 2:55PM
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I have feelers out all over this country and they tell me things are improving and demand is strengthening.  The market however is a forward indicator and has for some time been out of touch with macro economics.  I do feel if folks were left alone at this point we could see some really good growth.  There is this feeling though that the controls enacted by the elites really don't want this to happen.  Their control is more important than the overall well being of Americans and this unknowing angst is what many people feel.  We can all agree if we went into Lowes or H.D. or Target or wherever and we saw tons of stuff made in America we would all be better off.  But I don't think this is part of the equation of those in control and they will do their best to inhibit this growth.  This is just my opinion of course but we shall see. 
Apr 16, 2014 2:44PM
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Jim, that is a excellent question ! I think that we're going to have more up's & down's due to high gas/oil, uncertainty in revenue coming into markets, but then you're going to have some positive signs in retail & manufacturing pushing against those negatives. It's a mixed bag ! 

Everyone agrees that we desperately need improvements in our infrastructure. Here in Florida, we're seeing much of that already so look at Caterpillar and others that operate in this industry.

V_L did say to invest locally- which is best. But the world isn't going to end in bloodshed- unless you're a cattle rancher (pray for those guys & put feet to those prayers too with your support). 
So keep your wits, invest locally, vote those crazy dem's out in Nov.14', and everything should be fine. 
Apr 16, 2014 2:34PM
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There will come a time when the " bottom" will resemble the "top".
Apr 16, 2014 4:58PM
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I'm a billionaire in Obama Dollars
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Hmmm get companies to do something about hiring??? Raise the capital gains tax on stocks that are not hiring to 50 percent -- drop the capital gains tax on stocks that are hiring Americans to 10 percent. -- raise the capital gains tax on companies having more operations overseas than here  to 75 percent

Imagine there would be a whole lot of hiring going on very quickly across America.

QUOTE
 " U.S. businesses are still in a "defensive crouch" and are not aggressively hiring largely because of uncertainty over fiscal policy, Dallas Federal Reserve Bank President Richard Fisher said on Wednesday.

Fisher, who has often blamed the slow U.S. recovery on gridlock in the U.S. Congress over budget and long-term debt issues, urged lawmakers to think "at all times" about how to create jobs and incentivize businesses to hire. "

UNQUOTE



Apr 16, 2014 1:24PM
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If you really want to see what's going on compare SOCL vs. TDIV.  One's up 40% and the others down 40% in the last 6-9 months. The new consumer tech fueled by social media and network advertising expectations is being challenged by the old real tech fueled by enterprises and workers.  Rotating online revenue and profits from brick and mortar can only go so far.  If FB and TWTR are going to become giant what's that say for Google's advertising revenue? How much productivity is really created with iPads viewing YouTube and porn sites?  Office 365 is a great deal for $100 per year in 5 devices. PC's are not dead.
Apr 16, 2014 5:34PM
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urkel's answer to the runaway inflation his QE 1 thru 1,000  has created = raise welfare and food stamp handouts to make up the 28% inflation (since 2009) .  Whatta 'leader.'
Apr 16, 2014 12:59PM
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Finding the Bottom in the Markets....

Is like finding the bottom when you are fishing on a lake...

When the line quits going down, you may be on bottom? Unless you landed on a weed patch.?

I'm just really not too sure how many weed patches, are in the Markets..?


If you move over 20 feet on a Lake, the bottom may be somewhere else...?

That may be true in the Markets also...?

I hope this helps some of us...?

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