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Oil Is All That Matters

Tuesday, 22 Jul 2008 | 6:26 PM ET

After a number of poor earnings reports last night, investors might be wondering why the market closed up 135 points Tuesday. Cramer has the answer.

The drop in oil prices.

The Bulls Are Back
An optimistic outlook on the market, with Mad Money host Jim Cramer.

Most people probably thought bad numbers from Apple , Texas Instruments , Sandisk and American Express would hurt stocks today. And for at least the first hour of trading, they were right. But oil’s recent decline has provided some much-needed breathing room to key areas of the market: airlines, chemical companies, industrials and consumer-products firms like Kimberly Clark and Colgate-Palmolive. As oil comes down, most stocks should go higher.

How does Cramer know? Because the last time oil was at $126, the S&P 500 – a broad view of the market – was at 1,403. That’s about 10% higher than the index is now. When natural gas was $9, the S&P was 3.5% higher. Average the two and you can pretty much assume the S&P 500 is 6.7% off its mark. Cramer’s expecting a recovery.

Now, of course, oil and gas stocks won’t be a part of this bull run, but the rest of the market should see some nice gains. Especially now that some of the systemic risk in the banking industry has been cleared up.

This trend will split Wall Street into two camps, Cramer said: investors who take a bottom-up approach, focusing on earnings, and the big-picture macro investors.

The bottom-up investors will point to lower prices at the pump as proof that retailers and restaurants will do better. These are the sectors hurt also by home-price depreciation, and the pressure release in that area could put homeowners in position to pay off their equity loans.

The other group, the big-picture investors, will view lower oil prices as a slowdown. This will send them toward defensive names like CR Bard, Becton Dickinson and other biotechs that do well in this environment. Kimberly Clark, too, a defense stock that’s up despite bad earnings because it’s the kind of investment big-picture guys look for in an environment like this one.

The bottom line: Oil is all that matters. And that’s why the market’s going higher.






Questions for Cramer? madmoney@cnbc.com

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

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