Jim Cramer of CNBC said he wasn’t surprised by the Nasdaq’s decline on Monday, saying that the Bed Bath & Beyond trading frenzy last week suggested that the index would be about to weaken.
Cramer made reference to two cautions he issued to CNBC Investing Club members last week regarding the possibility for meme-stock froth to spread into the larger market, particularly the tech-heavy Nasdaq, in Monday’s broadcast of “Mad Money.” These warnings first appeared on Wednesday morning and then on Friday afternoon.
For the purpose of raising money, Cramer sold two positions in his Charitable Trust on Wednesday. He cited the Bed Bath & Beyond scandal as one of his justifications. I want you to ring the bell the next time you see one of these meme stocks rising, Cramer remarked on Monday. “Even though I predict further suffering, it’s kind of too late to sell at this moment because the Nasdaq has already lost more than 6% of its value from its highs last week. When the price drops by 12%, the suffering usually ends, thus it is better to just buy.
Cramer came to this conclusion by analysing seven instances since January 2021 in which retail traders bid up a company or group of equities that had been extensively shorted to levels that were unrelated to underlying fundamentals.
The initial GameStop frenzy in late January 2021 is the first incident in the data set, and the most current instance is focused on the enormous two-day surge GameStop shares made on May 25 and May 26. In six of the seven resurgences of meme stocks that Cramer discovered, the Nasdaq experienced a significant downturn in the weeks that followed, according to Cramer. Even if some of the most popular meme stocks, such as GameStop and AMC Entertainment, are not even listed on the Nasdaq, it makes no difference. The average Nasdaq loss, according to him, was approximately 12%, which is the level at which Cramer said it would be time to invest money, albeit the intensity of the downturns vary.
“I am aware that you may think the link is a little shaky. Why would market rises based on memes indicate that stocks had peaked? because it is a classic indication of froth. It demonstrates how the bulls are becoming complacent and how speculative activity is out of control, according to Cramer.
Retail investors who have been burnt by the market may be a contributing factor in some of the selling pressure. The more significant element, according to Cramer, is how large market participants react to the meme-stock frenzy.
Money managers detest it when stocks can’t be judged on the fundamentals, even if it’s a stock they don’t particularly care about, Cramer said. “When they see this kind of action, they tend to throw up their hands and step back for a while,” he added. In other words, the hedge fund people decide to take some winnings and perhaps take a weeklong vacation because they feel like the patients are running the asylum as a result of these meme stock spikes.