Love him. Hate him. Ignore him. Every one has an opinion on Jim Cramer. Truth is, he’s trying to make a living, and found the unique niche and millions of viewers and readers that we’d all like to have. The guy’s an entertainer. He beat the market last year.
But does that mean you trade on his recommendations? No.
What spikes Jim Cramer-mentioned stocks are the thousands of viewers that follow his every word. It’s called the CNBC Effect, or, in this case, the Jim Cramer Effect.
Take a look at Wind River Systems (WIND:NASDAQ).
On January 17, 2008, Jim Cramer mentioned that Wind River Systems (WIND) was “incredibly cheap right now, trading just a quarter below its 52-week low.” It was part of the reason Cramer liked it as a possible buyout target.
On his mention alone, the stock gapped to about $9 the following day, as volume surged. But as you can see from the chart below, the Cramer-effect was short lived. Any short-term buyers following his WIND advice bought too late and lost money on the pullback to $8.
Could it eventually spike on Cramer’s buyout speculation? Sure. But what we’re proving here is that you can’t profit well from watching TV. If 400,000 people are trading on your every word, the smaller retail buyers can’t profit from the sudden spikes in prices. They’ll get eaten alive.
And when they do buy, it’s too late. The “sheep” have piled in, spiking the stock price, and turnaround, in most cases, is imminent.
On January 8, 2007, Cramer recommended a buy on Optium Corporation (OPTM:NASDAQ). The “Cramer phenomenon” spiked it to $26.50 from a $24 close, before it died off.
The same thing happened with Savient (SVNT:NASDAQ) after a January 5, 2007 recommendation. The “Cramer phenomenon” induced a gap up on extremely heavy January 8 volume. This time, the call was right. You have to give the man his kudos on that.
But oftentimes, you’re buying with thousands of other people, creating artificial volume and price spikes that may or may not last. It’s treacherous trading CNBC mentions, especially when the buy button is being hit by thousands – the same time you’re hitting the buy button.
