Ralph
30.01.2001, 15:20
A Little PMC TLC: How Its Wild Ride Lowered the
Risk of Stock Ownership
By James J. Cramer
01/30/01 7:06 AM ET
It is not often that a 30% decline emboldens people. Rarely have I ever seen a stock go down 25 points and people rejoice with relief. But that's what happened with
PMC-Sierra (PMCS:Nasdaq - news - boards) last week.
Sure, the PMC-Sierra decline took your breath away if you were long it. The company's inability to articulate what went wrong seemed to compound things, especially given that the press release the company issued read as if everything was hunky-dory.
Yet, if you were short PMC you had to be disappointed. First, it opened at its low and rallied. Typically, in 2000, the opposite pattern occurred. Blown-up stocks opened at their high and then sold down, no matter how low they opened.
Second, PMC failed to take out its low! That's amazing. It hung in at a price that wasn't as low as the stock had been on pure market declines.
The failure to go down to the $50s made the longs feel much more sure of themselves. It changed the risk-reward.
I think that's one of the reasons why Cisco (CSCO:Nasdaq - news - boards) failed to fall more even after John Chambers was downbeat. Market players are all of the time analogizing one stock to another: "If PMC doesn't take out its low on its bad news, Cisco shouldn't take out its low on this round of bad news."
Seems superficial? Look, people are always hunting for benchmarks of value. Right now the market is wrestling with the possibility that the stock market got too negative in the first week of January and that those prices are not going to be seen again. (By the way, that's a point I readily agree with.)
We are beginning to believe that we aren't going to go back to Nazz 2000, let alone Nazz 1500. We are also beginning to believe that we are no longer in a market that takes giant chunks of value out of stocks on the slightest disappointment.
That's what PMC meant to the market. It lowered the risk to owning stocks to a level that more are willing to tolerate. This is all part of a process that I think will take us substantially higher before we even suspect it.
It will also continue to force the short-sellers to cover because, increasingly, the punishment of being short when something doesn't go wrong is a lot worse than the pleasure of catching the blow-up smack in the kisser.
This is a common phenomenon when the market makes its big sea change. Or, to put it another way, stocks collectively got to a level where they were not so wildly overpriced anymore. If I can analogize to a building, you don't get hurt as badly when you jump from the second floor as when you jump from the tenth floor. Of course, we always would prefer to buy in from the ground floor. But that, alas, is almost always elusive except for a small moment in time. So, we take the risk of the second floor and we buy much more than we would if we were back on the tenth floor. And we remember that when we get to the tenth floor, the risk will once again be too great.
Relax, though, we have a long way to go.
Source: TheStreet.com
***********************************************************
Ralph
Risk of Stock Ownership
By James J. Cramer
01/30/01 7:06 AM ET
It is not often that a 30% decline emboldens people. Rarely have I ever seen a stock go down 25 points and people rejoice with relief. But that's what happened with
PMC-Sierra (PMCS:Nasdaq - news - boards) last week.
Sure, the PMC-Sierra decline took your breath away if you were long it. The company's inability to articulate what went wrong seemed to compound things, especially given that the press release the company issued read as if everything was hunky-dory.
Yet, if you were short PMC you had to be disappointed. First, it opened at its low and rallied. Typically, in 2000, the opposite pattern occurred. Blown-up stocks opened at their high and then sold down, no matter how low they opened.
Second, PMC failed to take out its low! That's amazing. It hung in at a price that wasn't as low as the stock had been on pure market declines.
The failure to go down to the $50s made the longs feel much more sure of themselves. It changed the risk-reward.
I think that's one of the reasons why Cisco (CSCO:Nasdaq - news - boards) failed to fall more even after John Chambers was downbeat. Market players are all of the time analogizing one stock to another: "If PMC doesn't take out its low on its bad news, Cisco shouldn't take out its low on this round of bad news."
Seems superficial? Look, people are always hunting for benchmarks of value. Right now the market is wrestling with the possibility that the stock market got too negative in the first week of January and that those prices are not going to be seen again. (By the way, that's a point I readily agree with.)
We are beginning to believe that we aren't going to go back to Nazz 2000, let alone Nazz 1500. We are also beginning to believe that we are no longer in a market that takes giant chunks of value out of stocks on the slightest disappointment.
That's what PMC meant to the market. It lowered the risk to owning stocks to a level that more are willing to tolerate. This is all part of a process that I think will take us substantially higher before we even suspect it.
It will also continue to force the short-sellers to cover because, increasingly, the punishment of being short when something doesn't go wrong is a lot worse than the pleasure of catching the blow-up smack in the kisser.
This is a common phenomenon when the market makes its big sea change. Or, to put it another way, stocks collectively got to a level where they were not so wildly overpriced anymore. If I can analogize to a building, you don't get hurt as badly when you jump from the second floor as when you jump from the tenth floor. Of course, we always would prefer to buy in from the ground floor. But that, alas, is almost always elusive except for a small moment in time. So, we take the risk of the second floor and we buy much more than we would if we were back on the tenth floor. And we remember that when we get to the tenth floor, the risk will once again be too great.
Relax, though, we have a long way to go.
Source: TheStreet.com
***********************************************************
Ralph