Winners and Losers From the Recent Downturn: Cramer, TIPS, Small Caps, Crude

I've always been mad, I know I've been mad, like the most of us...
- Pink Floyd, Dark Side of the Moon

Ever wonder what it looks like when a crazy person goes insane? When someone who is half-unhinged on a normal day, nuts as a matter of course, has a personal three-sigma event?

Thanks to Jim Cramer, now we know. Last week the man went mad... if only for a few minutes. (If you haven't seen it, this is a can't-miss spectacle to behold. Click here for the YouTube clip.)

Offhand synopsis:

He has no idea! No idea! NO IDEA! I tell you I have not seen this since nineteen-ninety blah blah when I went five bid for blah blah in blah blah! ASLEEP! Bill Poole SHAME! NUTS! SHAMEFUL! Yeeearrrggh!

Watching that clip, I kept thinking of Private Hudson (Bill Paxton) from Aliens:

Private Hudson: That's it man, game over man, game over! What the [bleep] are we gonna do now? What are we gonna do?

Carter Burke: Maybe we could build a fire, sing a couple of songs, huh? Why don't we try that?

Amusingly, Ben Bernanke -- the ‘academic' with No idea! No idea! NONE! -- elected to play the calm, unflappable Burke to Cramer's manic Hudson.

The Fed's decision to leave interest rates unchanged on Tuesday -- and not immediately ride to Wall Street's rescue as Easy Al would have done -- was perhaps Bernanke's way of saying Gentlemen, gentlemen... Relax. Toast some marshmallows, hum a little Kumbayah. You leveraged your way into this, now deal with it. No cavalry coming just yet.

Based on the post-Fed bounce (as of this writing), Bernanke's cool response seems justified... and Cramer's "Armageddon" call a tad overdone for now. "Helicopter Ben" has enhanced his credibility by refusing to open the emergency spigot at the drop of a hat (or rather, the drop of an index).

Those who think Bernanke is wrong to be calm, don't forget: the Fed can always act on the spur of the moment if need be. If things deteriorate much further, Bernanke can respond with a surprise inter-meeting cut. (Greenspan was no stranger to this move; as a commodity broker back in 2000, I recall an inter-meeting ‘surprise' that made a client $30,000 in 30 seconds via S&P futures. Not bad for a quick trade.)

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In the vein of interest rates, Treasury Inflation Protected Securities (TIP) are worth observing here.

While we grudgingly respect Chairman Bernanke's savvy thus far, we feel there is no way he can win a rigged game... the Austrian End Game, that is, in which the ultimate decision is to "destroy the economy or destroy the currency" as Von Mises put it.

For Fed Chairmen and heads of state, the Hobson's choice outlined by Von Mises is really no choice at all. It's a no-brainer for governments to gradually debase their currencies in service to false stability, as they have been doing consistently since Roman times.

Thus we watch the uptrend in TIPS with interest. Upside follow-through on this recent correction could make for a swing trade entry. As shown in the chart above, the TIPS ETF has registered a clear change in trend and broken solidly above its 200 day exponential moving average (green line), where it now seeks support.

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Small cap stocks are not in a happy place, as evidenced by the performance of the Russell 2000 index (IWM). Another drum we have been banging for a while is the building divergence between small cap and large cap stocks. Near the end of the buyout frenzy, when multi-billion-dollar acquisitions were popping up faster than new Starbucks locations, large caps kept hold of their liquidity bid even as small cap enthusiasm waned.

We don't rejoice in the fall of the Russell 2K, though Tactical View has recommended buying long-dated puts on it more than once these past few months. Instead it is noted that what we have, now that the bloom is off the rose, is more a diverse "market of stocks," as opposed to a bullish one-size-fits-all "stock market."

Though the days may be over when any old thing gets bought -- no more windstorm for the turkeys to fly in -- there are still a lot of excellent small cap stocks out there worth scooping up.

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Crude oil is also getting dumped over the side -- temporarily we suspect -- as speculators elbow their way to the exits. We aren't surprised (surprise!) by this selloff, as evidenced by what we said two weeks ago:

The CFTC Commitment of Traders report shows large speculators (hedge funds, institutionals and commodity trading advisors) net long a record number of crude oil futures contracts, roughly 110,000 to the bullish side. Such a heavy weighting increases the odds of profit taking, as gasoline prices soften a bit and OPEC hints at a willingness to increase production. The market's nonresponse to new oil-related violence in Nigeria suggests temporary saturation on the long side.

Whether the selloff picks up steam or not, we aren't deeply interested in shorting crude (except, perhaps, as a potential portfolio hedge for concentrated energy stock positions). Instead, we'd rather watch for confirmation that the coast is clear to pick up energy-related bargains on the long side. (And what bargains there could be...)