July 31st, 2008

A Bet With Cramer

I have to put my two cents into the fray resulting from his Mad Money Recap: Bye, Bye Bears. I found the following quote on his site (I no longer watch the show so the only way I now learn about his outrageous calls is because my wife is still on his mailing list):

“I’m sticking my neck out and calling the bottom,” … with earnings coming in strong across the board, except in the financial sector, (he) said the markets may finally be leaving the bears behind….“The next big dip in the market may be the last one,” he said.

Like all traditional marketeers, he sticks his head in the guillotine based on fundamentals. I assume his nod at behavioral finance, market sentiment and psychology and momentum comes by acknowledging there will be another big dip, the “last one”.

Does he say when? Does he give any indication of how big a “dip” this last one will be? No, he just wants to be on record for being one of the first to call a bottom …. even if its 6-12 months and 10-20% too soon.

If he’s sticking his neck out, so will I. I’d be willing to make him a side wager that the market, as measured by the S&P 500 will see 1150 (10% down from 1278 as of 10:22 today) before it sees 1405 (10% up from current). Here’s what I base my call on:

The chart above is a intermediate-term chart of the S&P 500. Note the following:

  • The Index today is back to where it was in 2006. Most of 2007 was spent making the rounded top of what I believe ultimately will be the head of a extended head-and-shoulder top formation.
  • The top is being formed under the resistance trendline extending out from the all-time made at the top of the tech bubble in 2000
  • Market “Tops” and “Bottoms” take a long time to form because it takes a long time for psychology and sentiment to change and players to convert. It’s too early to say that sort of transition process is happening or, if it is, when the process began.
  • It looks to me like the market is processing the right shoulder at about the same height at the left (not the dotted sloping trendline above the neckline).

The pattern and market action looks similar to other major market tops (see my June 27 comparison to the 1972-74 bear market) in which I wrote:

I’m not a seer and can’t claim to know what’s going to happen next week but I can say with some certainty that if the market breaches that support, the market will be pretty much in a free fall. There wasn’t much to stop it from dropping like a stone from October to mid-January (18% in about 3 months!). And if this support level fails (and my bet is that it will), we could see another 15-20% drop to 1150.

The reason Jim won’t take me up on this bet is because he has much more to lose than I do. He has his multi-year, mega-million dollar contract with CNBC. If I lose, few will remember this bet other than you, my wife and Jim, if he were to take me up on it. But, then again, I wouldn’t be too upset if I’m wrong and Jim’s right because then I’ll be able to again assume my natural optomistic outlook. The past 8 months have been uncomfortable, slow, boring and, for someone who lives on his trading profits, an extended dry period.

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