We do not quote media pundits very often, but, good points made below.
One of the worst myths out there is that the market is always rational and makes sense. On any given day the market can be totally wacky for reasons that do not make sense. Sometimes stocks go up when they should have gone down, and sometimes entire sectors move for ridiculous reasons. "Never assume that just because something happened it has to make sense because the market is always supposed to make sense. That's nonsense," says CNBC contributor Jim Cramer. It is important to be able to look at some of the crazy moves and understand that the stock moves are just nuts. Because once you start cooking up connections where none exist — Cramer says that is where you are really in trouble, because you can make yourself believe just about anything.
So, what are some of the crazy catalysts that move stocks? Many reasons have nothing to do with the underlying prospects of actual companies. When that happens, he recommends taking advantage of that irrationality, not to buy into it by chasing stocks or panicking out of them. "Remember, nobody ever made a dime panicking," the "Mad Money" host said. For instance, sometimes the market is hit with a huge pullback and a lot of stocks go down even though it has nothing to do with fundamentals of the company. Hedge funds that are in trouble will start selling to raise money to pay back unhappy clients who are demanding money. Or sometimes there is a red-hot deal, which is so massive that the mutual funds have to sell stocks in order to raise cash to get in on the deal. It's crazy, but mutual funds don't keep cash on hand to make these kinds of investments. That means they don't have enough cash to participate unless they sell stocks they own.
But regular investors will see the selling and start to panic, dumping stocks in turn. Ultimately, this will trigger a selloff, and the media will try to cook up reasons all over the place to explain why otherwise stable stocks went down. "The worst mistake, the most common mistake you can make these days, is to say that because a particular stock or commodity trades at a given level, it therefore deserves to trade there. Often, that is just fiction now," Cramer said. So, when everything in the market or in a particular sector goes down, instead of assuming that the issue pertains to the fundamentals of the underlying company, Cramer suggested to ask yourself if it could have been caused by an out of control hedge fund or Wall Street money management. Then realize that the market's irrationality can provide opportunity.