Jim Cramer: This Rally Is All About China Blinking

 | Jul 12, 2018 | 3:59 PM EDT
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Every day, around the middle of the afternoon, I look at what stocks are up the most. I try to get a feel for things. Today I looked and there was just no commonality at all. We had airlines. We had financial technology. We had gaming. We had defense. Health care. Chip stocks. Softwares. No unifying theme at all. And that's when it dawned on me that the key to this amazingly bullish bounce -- the breadth was stunning. It was an across-the-board romp.

How do these rallies happen? I think it's instructive to unpack this one and recognize why we can rally in what is widely perceived as such an uncertain time.

First, I know that my view is in the minority when it comes to pundits and professionals who speak and write about the market, but this bounceback is all about China blinking.

Whether you like it or not, or believe it or not, when you get no instant retaliation from China and instead get the companies trying to crack into China see their stocks rallying, it emboldens you to think, wow, I don't want to be crosswise with this one. I don't want to find out that Mastercard (MA) or Visa (V) or American Express (AXP) have just been granted the right to come into China and let a billion credit cards bloom.

Yet those stocks were up yesterday and they are soaring again today. Can we really be like the warden in Shawshank and be this obtuse? Don't we have to conclude that something is happening.

Sure we don't want to put too much emphasis on some more diplomatic rhetoric by Treasury Secretary Steve Mnuchin. Back in March Mnuchin told us that he was "hopeful" that there could be a truce in the trade war with China. Back in May he told us that the trade war was "on hold."

I am not saying that we don't care what Mnuchin says. He is the Treasury Secretary after all. But we need to hear this kind of conciliatory tone from Peter Navarro, the president's closest adviser on trade, not from Mnuchin. We get that, we have a 5% rally that day.

But we do know that when the president is preoccupied with something, whether it be NATO or England, we are going to have a respite from angry tweets about China. Sure, instead we get angry tweets about Germany but how many people do they have in that country? The NFL plays in London now. It's like home field for everybody. Same with the President of the United States.

Or, to put it in words that every trader knows: you can't be short this market if China grants American Express the right to sell credit cards without a joint venture partner. It would be such a tremendous gesture. If Mastercard gets an instant license it would be priceless. The Chinese could say it has nothing to do with trade. That could bash the heck out of us. But it wouldn't matter as actions speak a heck of a lot louder than words. You think that stocks like these and Visa and PayPal (PYPL) go up idly? Think again.

So that's a key prop to the rally and it allowed all of the usual suspects that got hammered yesterday to go right back up today. It was as if Captain Renault from Casablanca is the puppeteer. Every Chinese industrial-might as well call them that-yep, everyone, flew right back to where it was before the $200 billion tariff target was unveiled.

What else? A huge amount of money flowed into the cloud kings and the chip stocks. You know I am a big believer that there is no new money coming into this market whatsoever except in index funds.

But how about when you get a spigot that opens in tech? We got that today when Broadcom (AVGO) changed its stripes. The stock of the gigantic semiconductor company got crushed today after it bought a software company that's linked to mainfame hardware.

That's the opposite of what the company's investors expected from the acquisitive Hock Tan, the CEO who tried and failed to buy Qualcomm (QCOM) not that long ago.

Or as a Twitter (TWTR) wag pointed out, he's not seen a stock get this crushed since I opined on the stock of defense giant Stark Industries, when Tony Stark decided to get out of the armaments business. I mean kapow.

It was almost as if to show their revulsion to the move, the sellers flocked to every single company that they now liked more than the disemboweled Broadcom. They plowed into the cloud kings, with Adobe (ADBE) , Salesforce (CRM) , Service Now (NOW) , Splunk (SPLK) , Workday (WDAY) , last night's guest, VMWare (VMW) and even quarter miser RedHat (RHT) ,soaring beyond all reason.

They piled into the semis that are like what Broadcom was until last night, Texas Instruments (TI) , Nvidia (NVDA) and Analog Devices (ADI) .

And, of course, who can resist FAANG. I know it must be repugnant to so many, including the obituary writers who can't resist laying out the bear case, but it had no takers today.

Still, though, I am selling this rally short if I just limit myself to those gems. The defense stocks, after stalling out yesterday, got jiggy. I think it's the irresistible notion that the Europeans are going to step up spending to placate the arms-dealer -in chief that is the President of the United States. Remember I think Raytheon's (RTN) Patriot Missiles are so easily bought that if you took down a half-dozen the president would give you his own most favored nation status and invite you to Mar-a-lago for nine holes. A dozen gets you 18?

Then we got a strange one. You bash the price of drugs, the money then flows to med tech. Huge rallies in Align Tech (ALGN) , the company that makes Invisalign braces, Intuitive Surgical and Illumina, all high -tech med equipment.

Oh and with the roaring popularity of video games and e-sports, the stocks of Electronic Arts (EA) , Activision Blizzard (ATVI) and Take Two burst higher. Grand Theft, Video? No, the Call of Duty to buy.

Now on any given day there's always a party pooper. Today it was the best performing stock of the era, Netflix (NFLX) . Why? Because the UBS Evidence Lab, a proprietary research arm of the joint, raised its price target dramatically for the stock but went buy to hold, essentially because of some research that showed that people are bingeing less on new sequels like Luke Cage Number two. I have no idea how they got this beyond checking google search but it did seem like the right thing to do IF there is any shortfall when the company reports so you can then go back to a buy. I just don't know if he is going to be that lucky. Finally there is Microsoft (MSFT) the unsung $800 billion dollar gorilla that no one even talks about as a stalking horse in the race to a trillion dollar market cap. Do you ever hear anyone sing this one's praises. Satya Nadella has quietly turned this company into a cloud king with Azure and a service hitter with Linked in. But not one seems to care except the endless buyers that is.

This stock is the quiet multi-hundred billionaire, just going about its thing, not a FAANG name, no real sponsorship but here it is, again, hitting an all-time high.

That's right, this is a day where the buyers couldn't be stopped. They knew the president was hanging with the Queen. They knew his newfound opponents were figuring out how to appease the guy they keep thinking is just way over the top. And they just couldn't resist buying just about everything except for the once loved now scorned Broadcom.


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