Cramer: What Moves a Stock

Text copyright © 2013 by J.J. Cramer & Co. From JIM CRAMER'S GET RICH CAREFULLY, reprinted with permission from Blue Rider Press, a member of Penguin Group (USA) LLC

If we are going to invest successfully in this new, more treacherous environment, we are going to have to recognize that bizarre stock movements have become a staple, if not the hallmark, of this era. Before we even get to the buying and selling of individual stocks in order to create wealth, we have to understand how stocks are impacted by both understandable events and what seem to be random gyrations that baffle and frighten us. We need to fathom these moves because when we become scared and confused investors we become emotional and reckless investors. Ignorance is the opposite of bliss in the stock market.

Let's take the most glaring example of a pernicious quarter-hour event that turned off more people to the stock market than just about anything since the Great Recession: the Flash Crash of May 6, 2010. I happened to be on television when this horrific 1,000-point decline occurred, and I have to tell you that it was one of the most mystifying moments in my career. Virtually nothing of any real import was happening; we were all chatting about riots in Greece at the moment the crash was triggered, ex­plaining why riots aren't a reason to sell off investments. But the market proceeded to decline so precipitously that a giant stock like Procter & Gamble traded at $60 one minute and then at $50 and then sliced right through $40, all within the confines of a commercial break. Fortunately, I was in a position to say there was nothing fundamentally wrong with P&G or a host of other stocks that were also plummeting, but I was at a loss to explain how it could happen.

It was only after the event and the subsequent run right back up that we realized it was just an example of the power of the S&P 500 stock fu­tures running roughshod over all stocks, as the market couldn't absorb a couple of huge sell orders that came into the futures pits in Chicago all at once. The pummeling in the stock futures cascaded over to individ­ual stocks, and the avalanche took down almost everything in its path as stocks broke down, triggering various sell strategies. Buyers were fleeing the market in fear that something larger and more terrible was occurring that no one knew about. When we found out there was nothing funda­mentally wrong, nothing that spooked the markets, just a series of over­zealous traders selling all at once, it turned out to be a terrific buying opportunity. However, the fact that there was no precipitating event for the 1,000-point decline, no real rhyme or reason for it, only served to scare people even more about the stock market. The whole asset class was tar­nished more in fourteen minutes of trading than when banks and brokers crashed in 2008 and high-flying dotbombs went off in 2000. The exit from the building has pretty much continued unbridled since the Flash Crash, aided by several other similar but smaller crashettes, as we call them, including perhaps the most bizarre of all: a total shutdown of the NASDAQ for three hours, the Flash Freeze. Unfortunately, these terrify­ing mechanistic obstacles have occurred during an incredibly good perfor­mance for the stock market. But can anyone blame those who flee? I understand the reasoning. Who would risk their hard-earned dollars on the stocks of even the strongest companies with the biggest dividends, the best earnings track records and most bountiful balance sheets, when their market capitalizations can be cut in half, or even more, during the time it takes to brush your teeth, shower and get dressed in the morning?

It's not just events like the Flash Crash, though, that confound people about this asset class and drive them to either more tangible investments like real estate or less rewarding ones like corporate and treasury bonds. There's the day-to-day interchange between stocks and bonds themselves, where the bond market seems to call the tune regularly over the stock market, even though it seems many companies should be immune to such movements. There's the "macro" tug of events, the impact of important economic influences, like jobless claims or pronouncements by the Federal Reserve or aggregate retail and home sales numbers, and how they can impact many of your stocks that you might believe shouldn't be buffeted by such extraneous issues. Even more disturbing is the role of a Cyprus bank failure, a Spanish employment report, a riot in Brazil or a slowing Chinese industrial production number on your purely domestic holdings, many of which might have nothing whatsoever to do with those overseas events.