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Predicting Market Moves

Wednesday, 29 Apr 2009 | 12:34 PM ET

There's a pretty broad-based consensus that good investors are people who understand how to predict the moves stocks make. That needs to be turned on its head. It's much more important to understand what stocks are predicting when they move higher or lower.

The stock market is perhaps the greatest forecasting machine ever haphazardly and accidentally thrown together by humanity. Typically stocks forecast out about six months into the future. If you understand what it is that they're predicting, you'll have a much better handle on what's going on in the market than if you simply focus on where those same stocks will go next. What stocks are saying is just as important as where you think they're going.

On Mad Money we think it's essential that you know how to read the mood of the market and always keep the predictive nature of stocks in mind.

This is the reason why it can be a good thing to see certain groups of stocks go down. On Monday night's show when Cramer was grading the performance of President Obama's first 100 days, he cited the poor performance of Pfizer, Kraft, Merck, and Procter & Gamble as evidence that Obama was doing a good job. When food and drug stocks go down, they are predicting that the economy will improve. Because people buy these companies when we're headed into a recession and sell them when it looks like we're headed for a recovery--in six months, remember, because that's how far out stocks tend to forecast--they've historically been pretty good indicators that a turn is coming.

Don't get so swept up in trying to predict where stocks are going to go that you forget entirely to look at what those stocks are predicting. It's very useful information. If you believe the weakness in the defensive food and drug names, then you've got the beginning of a great case for buying the more cyclical stocks that do well when the economy starts heating up.


Cliff Mason is the Senior Writer of CNBC's Mad Money w/Jim Cramer, and has been that program's primary writer, in cooperation with and under the supervision of Jim Cramer, since he began at CNBC as an intern during the summer of 2005. Mason was the author of a column at TheStreet.com during 2007, which he describes as "hilarious, if short-lived." He graduated from Harvard College in 2007. It was at Harvard that Mason learned to multi-task, mastering the art of seeming to pay attention to professors while writing scripts for Mad Money. Mason has co-written two books with Jim Cramer: Jim Cramer's Mad Money: Watch TV, Get Richand Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). He is 100% responsible for any parts of either book that you did not like.

Mason has also had a fruitful relationship with Jim Cramer as his nephew for the last 23 years and will hopefully continue to hold that position for many more as long as he doesn't do anything to get himself kicked out of the family.




Questions for Cramer? madmoney@cnbc.com

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

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