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Tech Maven
02-27-2007, 07:30 PM
Cramer: How the System Failed Us Today
By Jim Cramer Columnist
2/27/2007 4:15 PM EST

You didn't even have time to panic.

The system failed us, breaking down too fast for you to panic.

We totally collapsed between 2 p.m. and 3 p.m. ET, dropping 200 points. All the circuit breakers and all of the rules that were put into place years ago after 1987 just utterly failed.

Then we had the backdraft, and it happened so fast we don't yet know how it went wrong. But it did, with the sellers' heavy tinder. Maybe that exacerbated the hard-selling ETFs. Whatever it was, the wick caught and then flared -- when we thought we were fireproof.

The buyers, and there are plenty of them, simply couldn't get to the floor fast enough to buy and put out some of that selling.

In the old days, when things were sane, we would have had order imbalances, a stoppage of trading. We didn't get that today. We got nothing. We got nothing but a gap, and it reminded us of the old days, when we used to have to have bids way underneath. In other words, be ready to buy because of the whims of sellers.

But there's another difference now. You can force the market down. The old rules put into place in the 1930s, the ones that were meant to stop motivated sellers from breaking the market are all gone now, taken out by a complacent Securities and Exchange Commission that never dreamed of what could happen today. My sources indicate that a big options trade went awry and some concentrated ETF selling simply cut through this market as easily as a knife through butter.

You only have a couple of protections from the whims of a broken system:

1. A company that pays you a dividend that is equal to or better than Treasuries after taxes is a good defense.
2. Or you want a stock that has a valuation so low that you know it's a bargain -- and its management knows it's a bargain (read: it's buying back stock right here).
3. Last chance: a company that is so defensive in nature that even if there's a worldwide slowdown, it will meet expectations regardless: Coke (KO) , Pepsi (PEP) , Altria (MO) , Kellogg (K) , General Mills (GIS) , Clorox (CLX) and Colgate (CL) .

If you don't anything that fits one of those three criteria (I'd rather have two or three per company) you will not be OK for now. That's because we are now going to have people who just say, "Wow this is too crazy, let me out of here!"

But nobody ever made a dime panicking. This time will be no different, but only if you are shrewd about what won't hurt you and what can work in a volatile and down environment.

At the time of publication, Cramer was long Altria.