Stock Market Lessons from Cramer In Turmoil

As I scrambled to write my update on a “suddenly oversold” market stock market, I listened to Jim Cramer’s Mad Money. Cramer is naturally entertaining, and I particularly like hearing his take at key market moments like these. On Tuesday, February 25th, Cramer was firmly in the bearish camp on his Mad Money show. He said things like:

• “Cash is your pal, your king”
• “We’re not oversold enough”

The last point really got my attention because my conclusion was that the stock market was indeed oversold enough to compel to either aggressively step into a gap down open or to chase a rally with a few nibbles. I hoped that Cramer’s call would translate into the gap down

Fast forward to the very next morning ahead of the open on Wednesday. Stock futures were up (see snapshot above), and Cramer’s tune had already flipped. From CNBC’s Squawk on the Box here are some key and telling quotes from Cramer:

• “I think you’ve got to start buying something”
• “Am I optimistic? No … I’m just not as negative as I was”
• “Do you really just want to hate the market as much as you did minus 7% and haven’t bought anything? I can’t. My charitable trust [is] at 21% cash.”
• “I think staying negative down 7% is as irresponsible as staying positive up 7%.”

These quotes come from a mind struggling to come to grips with the prospect of a stock market potentially ripping higher right after firmly planting a bearish flag. The green in the futures was a reminder of the “buy low” mantra. Yet, a world full of growing risks make it impractical to be outright optimistic, foolhardy even. These ingredients are made for a recipe of turmoil.

More from Cramer:

• In response to being asked why not wait for the warnings to come when we know they’re coming: “I absolutely know you want to wait until the warnings come…I’m just saying if you had 20% cash…you’re not going to put 1% to work?”
• “I’m beginning to believe in the science. There is some risk that they do something good.”
• “If you haven’t put anything to work, I think you’re playing with fire.”

So as the conversation unfolded, Cramer became more and more optimistic in words even if not in mind. He tried to resolve his turmoil in a way that maintained bearish and bullish narratives in parallel. He placed both narratives on a platter for selection at a moment’s notice. Market rips higher? “I told you to buy something!” Market fades and plunges again? “I told you to wait for the warnings!”

This turmoil presents problems of implementation for the regular retail investor or trader. To have 20% in cash at the ready would mean that you were bearish ahead of the sell-off. So many people were enamored with the stock market’s ability to ignore any and all risks, I am guessing only the precious and fortunate few put themselves in a position of a stash of cash. Indeed, this lack of cash is a good reason why vicious sell-offs can continue once they get started. Moreover, once people sell, they are often not in a mental state to flip right around and start buying again.

Cramer’s turmoil is understandable, and I am sure it is playing out over and over all across financial markets. Too many people are trying to predict the unpredictable. Worse, some are going to the other extreme and see Black Swans around every corner (which by definition means these terrors are not Black Swans!). Pundits and the like are spending time nervously reading through government reports, researching viruses, generating historical comparisons, etc… in a vain attempt to quantify the risks ahead. The bias in the market is to buy (and hold) so these efforts are important to avoid missing the next rally or figuring out how much more to dump into the panic.

Yet this outbreak has and will defy prediction until most of it is behind us. I think it is most useful to remember that all flu outbreaks burn out at some point….and also remember that the global economy was already weakening ahead of this latest macro-economic risk. In other words, the coronavirus has just become a palpable representation of a market finally caring about already existing risk and uncertainty.

In lieu of prediction, I am following my favorite technical indicator, AT40 (T2108), the percentage of stocks trading above their respective 40-day moving averages (DMAs). These trading strategies keep me focused and unemotional during periods of stock market extremes. Perhaps most importantly, AT40 keeps me out of the business of reading the crystal balls that cause so much stress and turmoil.

Be careful out there!