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Cramer: Vicious trend could hit good stocks

(Click for video linked to searchable transcript of this Mad Money segment)

There's a vicious new trend underway in the market and Jim Cramer says stocks of perfectly good companies could take a big hit.

Here's what's happening.

Economic data points and comments from the Fed have sparked a belief that the economy may soon percolate again.

That may not sound like a catalyst for a selloff but the "Mad Money" host insists that it is.

"You see, when the economy picks up speed, big institutional money managers who dominate the market start moving their capital into the stocks of boom-and-bust cyclical companies that can produce spectacular growth during an economic expansion," Cramer explained.

But they don't have an infinite supply of money, therefore they have to sell some of their holdings.

Barbara Jordan | Photographer's Choice | Getty Images

And Cramer says when big money wants to raise cash ahead of an expected growth cycle, "they sell stocks of secular companies; those are the kinds of companies that thrive in pretty much any economic climate."

The phenomenon is known as rotation and the belief is that the money will grow faster in cyclical stocks than in secular growth stocks.

But there's an irony to this rotation. It causes the stocks of high-quality companies to selloff sharply, for no good reason," Cramer said

The "Mad Money" host thinks declines in the biotech sector are largely due to this phenomenon.

"Over the last month, quality biotechs such as Celgene, Gildead, Regeneron and Biogen have all gotten crushed. Yet nothing's changed at these firms. They're declining simply because their stocks are out of favor with hedge funds who would rather cash out and put that money to work in cyclical stocks."

Because the fundamentals remain unchanged, Cramer thinks the declines present opportunities.

Of course, that begs the question, when to pull the trigger?

When high quality companies with strong fundamentals decline, Cramer thinks about scaling into new positions, almost right away.

But, before he puts his first dollar to work in a new position, Cramer also likes to consult technical analysis to see if chart patterns confirm, or deny, his outlook.

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According to insights from top technical analyst Bob Lang, now may be a very good time to buy.

Although patterns in the daily chart of the biotech ETF (IBB) say near-term upside is limited, patterns in the weekly chart show the long-term uptrend remains intact. And as long as the long-term uptrend remains positive, Lang thinks weakness could present a buying opportunity, as long as you're buying as an investment.

"That doesn't mean biotech stocks can't go lower still," Cramer added, "but if you're a long-term investor I'd get ready to pull the trigger." Rotation underway in the market appears to be creating opportunity.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

Symbol
Price
 
Change
%Change
IBB
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CELG
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GILD
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REGN
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BIIB
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