Jim Cramer: There's No Market Smell Test

Tickers in this article: CLX MSFT STX WDC
NEW YORK (Real Money) --
"For most private investors, the bad news is good news for stocks story just doesn't pass the smell test."

I saw that tweet this morning and I wrote in return that "it's always been like this."

The follower then came back to the effect that even if it is has always been like this, that doesn't make it right.

And there' that word again: "right." I think that "right" has to be the most expensive word in the business. This is not an ethics class. It isn't an exercise in some bizarre form of justice.

Yet what seems obvious to me appears opaque to others, and I seem like someone who wants to get away with something, while those who think it's not right represent the true path of reason.

How did this happen? How could so many people feel like @PaulKinglsey, who typed that tweet?

I think that debunking the tweet's misperception is central to trying to figure out the next leg of this market, because it holds the key to whether stocks can attain a higher level than we have reached already.

First, there is no smell test. When you invest in stocks you are trying to divine the direction the market will take. That requires lots of history and lots of pattern recognition and a lot of homework. Some, such as technicians, often think that pattern recognition is all that matters. Others think the whole exercise is wrong and they just look as stocks as an investment class that had done well over time so you need to own some of it.

Others, me included, like the pattern recognition and the quality of the asset class and believe that the best-of-breed stocks within that asset class can be discovered and exploited. Nowhere within the trio of reasons to own stocks is a smell test. What you are betting with when you invest when bad news is good news is the history leading up to when the economy flips into high gear and good news is good news. That's an explosive time for the market and you have to invest during the bad-news-is-good-news phase in order to reap the biggest gains. In other words, you have to be early and you have to anticipate.

If you wait until the tweeter wants the market to smell good, you have probably missed a great deal of the move.