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Why Pessimism Right Now Is Good for Profits

Thursday, 13 May 2010 | 6:44 PM ET

Greed is good?

Well, not so much, Cramer said Thursday. Too much greed usually means that a market top is approaching, a moment when stocks will soon run out of upside. He prefers a different take on the line made famous by Wall Street’s Gordon Gekko: Pessimism is good.

Pessimism, skepticism – take your pick. The important thing is that both of them keep greed in check. And they’re usually a sign that stocks still have room to move. In fact, the more doubt Cramer sees in the market, the more bullish he becomes.

Curb Your Enthusiasm?
Whypessimism and skepticism are engines of wealth, with Mad Money host Jim Cramer.

“You know we’re in trouble when people get too enthusiastic – that is the sign of a top, not a bottom,” Cramer said. “But when they’re pessimistic, when they’re skeptical, that’s how you know the market still has fuel to run.”

But what about this market right now? Cramer laid out six ways that pessimism and skepticism are helping out.

1. As unfortunate as last week’s 1,000-point intraday drop was, it sure cleared out the froth in the market. And froth is a big indication of a coming top.

2. Also last week, pessimism – whether by pundit or press – scared away everyone who wasn’t committed to their positions. Now the only people left are the solid, longer-term shareholders.

3. The negativity also has stalled the IPO market. But for good reason. Now investors are steering clear of bad deals like Expressand Road Runner Transportation. Cramer called this the opposite of the grab-any-offering-you-can mentality that ruled the dot-com boom of 1999.

4. The pessimists are also worried about falling oil prices. Cramer, however, sees it as a good thing. It means consumers will have more purchasing power as we head into the summer driving season. And he’s bullish on any de facto tax cut for consumers. Besides, crude is down only because it was up on a hedge fund short squeeze. Plus, declining oil is a deflationary trend that should force the Federal Reserve to continue to keep interest rates low.

5. People have also doubted the International Monetary Fund’s ability to effect real change in Europe, and that – along with worry about the euro – has kept a lot of money out of this market. But Cramer pointed to a great bond auction by Italy and the fact that Greek and Spanish bonds are trading like they’re close to investment grade. That means the IMF intervention is working.

6. Lastly, there’s housing. The bears are stressing this sector, but as USA Today reported, home foreclosures posted their first annual decline in five years. A peak in foreclosures puts banks in position to finally unload some of the reserves they’d set aside to protect against mortgage losses, which will translate into higher normalized earnings.

And once Washington’s done with its attempts at reform, Cramer said, the banks will be “ready for a monster move.”

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

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

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