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Cramer: The machines are at it again

Once again, Jim Cramer sees signs that the machines are ruling the market.

By machines, Cramer is referring to algorithmic trading, which he thinks accounts for some of the more bizarre market moves in recent years.

Because algorithms are mathematical formulas, they take the human element of buying and selling stocks, sometimes with head-scratching consequences.




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And it's those algorithms that Cramer thinks triggered Thursday's curious gains in Internet and 'software as a service' stocks, which rallied broadly as a group.

Events started with Yelp.

"It announced its quarter, which was better than expected, and within seconds the stock traded down, not up, breaking a pattern we've seen over and over again ever since the big reversal in Salesforce.com's stock at the end of February," Cramer said.

That is, until Yelp earnings, these so-called momentum stocks were popping in the aftermarket on strong revenue and then declining the next day.

"The algorithms had all been programmed to react to that 'regular' pattern. But Yelp broke the pattern."

In turn, the aberration in the pattern caused a broad reversal, in this case higher .

"Because the machines treat Internet momentum stocks as one big group, after Yelp reported, the entire group switched directions and flew up."

And now, because of the technical reversal, they could rally more.

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That's because the formulas are in part based on charts, "and the charts, which had been so horrendous for the momentum stocks, are now positive, which encourages even more algorithmic buying," Cramer said.

But that doesn't mean Cramer thinks you should buy. "The machines caused these names to turn on a dime, and they could easily do it again," Cramer said.

"However, I would like to welcome to Terminator 3: Rise of the Machines. This market might as well have been taken over by SkyNet, because this action is all about a program, a computer program. Unfortunately, the ripple these programs generate can have an enormous impact on your portfolio."


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