CNBC’s Jim Cramer said he was not shocked by the Nasdaq’s fall on Monday, explaining that the Bed Bath & Beyond trading frenzy last week pointed to a possible weakening of the index.
On Monday’s episode of “Mad Money,” Cramer referred to two warnings he gave members of the CNBC Investing Club last week about the potential for memes to spread to a wider market, especially the tech-saturated Nasdaq. These words of warning came first on Wednesday morning and then on Friday afternoon. On Wednesday, Cramer cut two positions at his charitable foundation to raise cash, citing the Bed Bath & Beyond debacle as one of the reasons for a defensive sale.
“The next time you see one of these memes grow, I want you to call the cash register,” Kramer said on Monday. “At this point, the Nasdaq is already down more than 6% from last week’s highs, so in a sense it’s too late to sell, although I expect more pain. Better to just buy as we approach the 12% drop where the pain has stopped.”
Cramer came to this conclusion by looking at seven periods since January 2021 when retail traders offered stocks or groups of stocks that were heavily discounted to levels that were unrelated to underlying fundamentals. The first example in the dataset is the original GameStop frenzy at the end of January 2021, while the most recent example focuses on the monstrous two-day GameStop stock move on May 25 and 26.
Kramer said that in six of the seven meme stock resurgences he identified, the Nasdaq pulled back significantly in the following weeks. It doesn’t matter that some of the biggest meme stocks, including GameStop and AMC Entertainment, aren’t even listed on the Nasdaq. While the severity of the downturns varies, he said the Nasdaq has averaged about a 12% drop, a level at which Cramer suggested it might be time to put the money to work.
“I know this connection may seem a bit weak to you. Why do meme stock rallies signal that stocks are peaking? Because it is a textbook sign of foam. said.
Part of the selling pressure may be due to the fact that retail investors got burned and decided to exit the market entirely. However, Cramer argued that the more important factor at play is how the big market players react to the meme stock run amok.
“When investment managers see action like this, they tend to give up and step aside for a bit, because they hate it when stocks can’t be judged by fundamentals, even if they’re stocks they don’t care about. “In other words, these spikes in meme stock make the hedge fund guys feel like the inmates are running the orphanage, so they decide to make some profit and maybe go on vacation for a week.”