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Jim Cramer Explains Why Meme-Stock Manias Are Bad News for the Nasdaq

Logan by Logan
August 23, 2022
in Stock Markets
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Jim Cramer Explains Why Meme-Stock Manias Are Bad News for the Nasdaq

Image Source- Getty Images

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Jim Cramer of CNBC said he wasn’t surprised by the Nasdaq’s decline on Monday, saying that the Bed Bath & Beyond trading frenzy last week suggested that the index would be about to weaken.

Cramer made reference to two cautions he issued to CNBC Investing Club members last week regarding the possibility for meme-stock froth to spread into the larger market, particularly the tech-heavy Nasdaq, in Monday’s broadcast of “Mad Money.” These warnings first appeared on Wednesday morning and then on Friday afternoon. Cramer reduced two positions in his Charitable Trust on Wednesday in order to raise money, citing the Bed Bath & Beyond scandal as one of the reasons for the defensive sales.

“The next time you see one of these meme stocks roaring, I want you to ring the register,” stated Cramer on Monday. “At this point, the Nasdaq’s already down more than 6% from its highs last week, so, in some ways, it’s too late to sell even as I expect more pain. Better to just buy as we get closer to down 12% where the pain has tended to stop.”

Cramer came to this conclusion by analyzing seven instances since January 2021 in which retail traders bid up a company or group of equities that had been extensively shorted to levels that were unrelated to underlying fundamentals. The initial GameStop frenzy in late January 2021 is the first incident in the data set, and the most current instance is focused on the enormous two-day surge GameStop shares made on May 25 and May 26.

Image Source- CNBC

In six of the seven resurgences of meme stocks that Cramer discovered, the Nasdaq experienced a significant downturn in the weeks that followed, according to Cramer. Even if some of the most popular meme stocks, such as GameStop and AMC Entertainment, are not even listed on the Nasdaq, it makes no difference. The average Nasdaq loss, according to him, was approximately 12%, which is the level at which Cramer said it would be time to invest money, albeit the intensity of the downturns vary.

“I know the connection might seem a little tenuous to you. Why would meme stock rallies signal that stocks are peaking? Because it’s a textbook sign of froth. It shows you that the bulls are getting complacent, and speculation is running rampant,” Cramer said.

Retail investors who have been disappointed may have decided to completely withdraw from the market, which might be part of the selling pressure. Cramer countered that how large market investors react to the meme-stock bubble is actually the more crucial aspect at work.

“When money managers see this kind of action, they tend to throw up their hands and step aside for a bit because they hate it when stocks can’t be judged on the fundamentals, even if it’s stocks that they don’t really care about,” Cramer said. “In other words, these meme stock spikes make the hedge fund guys feel like the inmates are running the asylum, so they decide to take some profits and maybe go on vacation for a week.”

Tags: AMC Entertainmentasylumbad news for the NasdaqBed Bath & BeyondBed Bath & Beyond trading frenzy indicated weakness in the indexbroader marketCramerdefensive salesed Bath & BeyondGameStopGameStop frenzyGameStop shareshedge fundinmates are running the asylumJim Cramerlarge market participantsmeme stockmeme stock spikes make the hedge fund guys feel like the inmatesmeme stocks roaringmeme-stockmeme-stock frothmeme-stock maniasNasdaqNasdaq’s plungeretail investorsspeculation is running rampantspillover effects of meme-stock maniastake some profitstech-heavy Nasdaqwhy meme-stock manias are bad news for the Nasdaq
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