The psychology of deflation is in full force now.
We are all now gripped with a single, "brilliant" notion, that if we do nothing we will be able to buy whatever we want at lower prices than we currently trade at.
That's a vicious psychology that will prove very hard to break.
I see it in venture capital deals where people are holding out to get lower prices when they size up private businesses. I see it in the public markets because they say, "Why buy National Gift Wrap now" when I know it will be lower if I do nothing.
If It’s Not on Sale You’re Paying Too Much
When I was at the hedge fund, I used to call this the "Federated" problem, which was an allusion to the department store chain that almost destroyed its business by running so many sales that you felt like a chump whenever you bought because you could figure the item would be marked down even lower the next week.
Of course, like so many things in this market, we are seeing the exact opposite mindset that we saw in the February time frame last year. That's when I was trading the highfliers and knew that if I bought them today, someone would pay more for them tomorrow — so I had to move..
When I say it is too late to sell, what I mean is that I am trying to anticipate the ending of this negative psychology and buy stocks ahead of when it ends.
Obviously I don't know when the cycle ends. If I knew the day, I would take all the money I have in the world and buy S&P options the day before (yes, I think the SPX is better than the NDX here).
So, because I don't know when it will end, I buy on the way down, getting bigger as prices drop. That's why I am buying these solid names that are down so much.
When the psychology changes, I am quite confident you will pay much more than you currently pay for AOL Time Warner and Merrill Lynch.
We Aren’t Far Off
What changes the psychology? Well, what changed it last year? Lots of insider selling. Massive secondary selling. A vigilant Fed that was bent on taking the market down. Ridiculous overvaluation. What could change it this time? Lots of insider buying. Lots of corporate buybacks. An easy Fed that was bent on taking the market up. Ridiculous undervaluation.
We aren't there yet, but with days like Wednesday and Tuesday fresh in my mind, I know we aren't far off.
Ultimately, what has kept us from breaking this cycle is a combination of people refusing to sell and others trying to catch the bottom in tech. Redemptions are forcing the mutual funds to sell, and I think we have crushed level after level of bottom-fishers.
So we are very much on course.
James J. Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for the network of TSC sites and serves as an adviser to the company’s CEO.