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  1. Home
  2. / Investing
  3. / U.S. Equity

How to Find True North in This Market

A weak dollar, lower interest rates, a quiet Fed and higher oil.
By JIM CRAMER
Aug 12, 2015 | 04:18 PM EDT
Stocks quotes in this article: BABA, YHOO, GIS, PG, KMI, COP, AAPL, FOSL, M

Never forget what brought you down. Never forget what can bring you back up -- although people often do, which is why this market could plummet and then regain its sense at the end of the day.

Much of the time people let their emotions be controlled by "the action" or "the tape," rather than be clinical about things. For example, for days on end, we had declines in the oil stocks and there was widespread agreement that the oil stocks were the most dangerous stocks out there. Then last night we presented a very clinical -- not emotional -- analysis of the negativity toward the group, as presented by the charts. We observed patterns that showed every time we got this level of selling we saw a climax low and then a big bounce. Most of you, at least according to my Twitter feed (@JimCramer) seemed incredulous. I found the chart work by the much-more-often-right-than-wrong Bob Lang pretty convincing. Voila, we had the biggest oil stock rally in ages. That's what I mean by clinical.

Same with the overall market. You know I haven't liked the setup for ages, and that skepticism has been warranted as the Dow Jones Industrial Average had been down nine out of the last 10 days. But, like the oils, things can get overdone.

I know, for example, that the S&P 500 stock futures took another header last night when the Chinese took their currency down again. These are rattling affairs and they have widespread implications. First, there's the blast zone implications, meaning the Chinese wouldn't be this reckless or moving this quickly unless things had really cooled in their country.

We get instant validation these days, like the validation that came from the quarter Alibaba (BABA) put out this morning. Sure, the company had great growth, but nowhere near what we were expecting and it was tarred and feathered for it but good. When we interviewed Daniel Zhang, Alibaba Group CEO on "Squawk on the Street" this morning, he sounded like a politician totally on message about the long-term growth prospects. Look, I didn't expect him to be a politician like Donald Trump, but I would have liked something extemporaneous besides an acknowledgement that the he's monitoring the Chinese economy, a repeated mantra.

Of course, Yahoo! (YHOO) felt the collateral damage instantly as it owns 384 million BABA shares -- shares that could have been sold a long time ago except management didn't want to pay the taxes and was trying to finagle a tax-advantaged vehicle to avoid the bill. When Yahoo! announced that it was creating that clever plan, its stock jumped by $3.51 to $51.50. Alibaba at the time was at $95. Now, with Yahoo! still toting all that Alibaba stock, it's fallen to $34 -- pretty much in unison with Alibaba's plunge to its all-time low of $72. It's a brutal reminder of how I always urge you to pay the taxman rather than risk giving up a big gain.

China pulled down a host of currencies worldwide and once again crushed commodities of all sorts including, oddly, the grains, not just the minerals. But here's where it gets interesting: China didn't pull down crude. I mentioned the rally in the stock earlier, but there's a lot more at work here and it, too, must be addressed clinically.

Go back to this horrendous morning for the bulls, where almost every stock was drenched in red ink. When my co-host Carl Quintanilla asked me how I felt about the market, I said that I was kind of sanguine about it because the indicators I look at were all flashing green after a profound period of flashing red.

Remember, I have been keying on three things: the super freakin' strong dollar (which you know by now, or you should just by being Pavlovian and hearing Rick James' screeching every night on "Mad Money" as I decry a strong dollar). It's bad for the mother's milk of stock prices, the earnings estimates, which will keep having to be cut if this currency keeps jaunting higher.

But this morning it went lower, not higher, which is why I wrote earlier that the vitals of this market had changed. I can't suddenly say, "Nope, I don't care about it anymore just because the market looks down." When you have a totem like that going the right way, you want to take the other side of the trade.

Why was the dollar actually getting weaker? Because of another thing I wanted to see: a possible Fed reaction to the notion that it's too risky to raise rates right now. One of the major reasons the dollar's been so impossibly powerful is because the majority of market participants, even as recently as last Friday after the employment report came out, started betting on a Fed rate hike next month. But the ensuing events from China shocked people and (unless the Fed is totally oblivious) really chilled the rate-hike talk. That, plus the finishing of the Greek deal, has caused the euro to go somewhat higher on its own. Not bad. A weaker dollar means that oil can at least stabilize, which is what happened, and it held the same level today as yesterday. Again, that's bullish.

All the other commodities plummeting, however, contributed to longer-term interest rates in this country going down. That makes the old bond-market-equivalent stocks, like the utilities and the real estate investment trusts, go higher. That's always a positive sign. I reiterate that there's more to come as the 3% yielders that benefit from commodity deflation, like General Mills (GIS) or even the beleaguered Procter & Gamble (PG) could rally.

And here's a first: The oils with good yields that right now can afford them all rallied. Did you see Kinder Morgan (KMI) up a buck? ConocoPhillips (COP) up a buck and a quarter? Telling.

Oh, and one other thing I wanted to see: Apple (AAPL) shake off China. Sure, it has a lot of business in China. Absolutely it's probably being hurt. Definitely, the stock is in weak hands. But it trades at 11x earnings excluding cash, which is starting to factor a steeper decline in cellphone sales that may not even be occurring. Further, I heard not one but two bits of data that make me feel that the Apple Watch isn't the total washout everyone seems to think it is. First, Fossil (FOSL), one of the biggest watch-sellers in the world, actually noted the Apple Watch as a reason for its earnings shortfall. Second, Macy's (M) called out watches as particularly soft. Might that be the Apple Watch, too?

Now not all is good, by any means. The banks are in limbo, as they need higher rates to make their numbers. The high-growth stocks were hammered today and they've been holding up fairly well. I can see a silver lining, though, namely because these stocks are often the last to be slaughtered in a pronounced selloff -- and slaughtered they were with a breathtakingly horrendous intraday collapses. But the late-day reversal will have staying power if China just shuts up for the evening and doesn't do anything catastrophic. That would be a welcome change from their desperate flailing.

Still, the fact is that a reversal of any kind from down to up scares the bears. It reminds them that after nine of 10 down days you can't be complacent any more than the bulls were complacent going into this downturn.

So never forget what's true north for this market: a weak dollar, lower interest rates, a quiet Fed and higher oil. You may think that these indicators shouldn't work. I mean, who wants higher oil prices? But what should or shouldn't work isn't as important as what actually works. And the troika showed up to play this morning, which meant the negativity had to be tempered and a rally off the lows could ensue.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long AAPL.

TAGS: Investing | U.S. Equity | Economy

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