After Wednesday’s decline, CNBC’s Jim Cramer warned that the market might stagnate further and advised investors to reduce part of their holdings.
“Things can still go right. I don’t want to freak you out. I just think stocks need a cooling-off period after this miraculous run, and we’re getting one for certain,” he said. “And you should take something off the table.”
Since mid-June, the market has risen as a result of falling commodity prices and encouraging July inflation figures.
After mixed retailer earnings reports and comments from the Federal Reserve’s July meeting, the rise, however, appeared to lose steam on Wednesday, with the major indices falling.
The “Mad Money” host gave three arguments for his conviction that Wednesday’s market activity might only be the beginning.
When the market has gotten excessively overbought or oversold and is poised for a reversal, Cramer and CNBC’s Investing Club employ the S&P 500 Short Range Oscillator, a reliable indicator.
Since the Oscillator has been overbought since late July, Cramer believes the market may be headed for a correction.
He thus recommended investors to close their positions in the stocks that had risen alongside the market since June.
The Federal Reserve will keep boosting interest rates
Investors shouldn’t expect that the Fed will be able to make a soft landing, especially while it’s still fighting inflation, Cramer reiterated in his warning on Tuesday.
The governors of the central bank said at their July meeting that they want to keep raising rates aggressively until inflation starts to decline significantly, while they could limit the tightening’s pace.
“The Fed’s going to be less aggressive than we expected two months ago, but they’re still on the warpath,” he said.
He emphasized that while housing and rent prices continue to be high, the drop in gas prices and shop inventory indicate that inflation is decreasing.
Strong job data also indicate that the Fed still has to lower inflation, which would also affect the market, Cramer continued.
The market is excessively filled with hype
According to Cramer, the most concerning sign that the market may drop is the fact that too many equities are surging higher than they should as a result of overexcited investors.
He gave the example of meme traders’ most recent obsession, Bed Bath & Beyond. Reddit traders flocked to the stock on Tuesday when activist Ryan Cohen placed a significant wager on it, which sent the price soaring by nearly 70% during intraday trading before closing the session up 29%.
Although the stock gained 12% by the day’s closing on Wednesday, shares of the retailer fell 14% in after-hours trading when Cohen declared his intention to sell all of his interest in the firm.
“We could see another big pullback like we saw after almost every other meme frenzy,” Cramer said.