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This Country Caused Tuesday’s Turnaround

Tuesday, 20 Jul 2010 | 7:00 PM ET

Be careful of headlines, Cramer said, because they can cost you a fortune.

Ripped From the Headlines?
Headlines can cost you a fortune.

Take Goldman Sachs , for example, which he said set the tone for a terrible session after reporting early Tuesday. The headlines, Cramer pointed out, heralded a major miss for the New York City-based financial institution. The broker earned 78 cents while the Street hoped for $1.99 and as a result, the stock traded down three points to $142 before the opening bell. But the headlines was "totally misleading," he explained, because according to a Goldman Sachs alumni bulletin, the investment bank really earned $2.75 after fines and penalty taxes were deducted. It's possible that Goldman could have earned even more if it weren’t for those "humongous" legal bills they paid.

The lesson here is to avoid trading headlines, Cramer said. "You would have missed a seven-point swing if you had taken time out to get the full story."

Elsewhere, headlines said Whirlpool reported a blow-out quarter with a boost to its full-year earnings estimates. But on the actual conference call, Cramer noted, management was so cautious that the stock got crushed, even on a "magnificent" day.

Johnson & Johnson blamed recessionary consumer behavior and unemployment for the decline in its consumer-products business. With that, one would think every consumer-related stock should be down off the news. Pepsico , for example, should be down $2.68 and not up $2.68 when it reported strong sales.

Headlines regarding Texas Instruments said technology sales were weak, but the company actually had slow orders from one client: Nokia . The tenor of the headlines for IBM also said the tech space was slowing, even though Cramer thinks the real problem was the company's "clumsy" management, who "raised the bar way too high" at its analyst meeting in May. With negative headlines regarding these two tech stocks, one might have sold Apple instead of buying it down five points from where it opened.

"Do you know that you could have made an astounding 20 points from that low to when Apple reported that magnificent number after the close?" Cramer asked. "You were thrown totally off the scent by the headlines."

It might have caused you to have sold Salesforce.com down three points because of IBM's negative headlines. These are examples of why Cramer doesn't want investors trading headlines, especially during earnings season. Instead, he recommends you do your homework.

But Tuesday’s rally had nothing to do with investors realizing that these headlines were bogus. In fact, Cramer thinks the rally came by way of China.

Early Tuesday, he saw that the Chinese markets had "exploded" upward by more than 2%. The European markets, however, looked "saggy" because of US headlines regarding Texas Instruments and IBM. At the opening, US markets took their cue from the European markets and they took their cue from us. Both markets pushed lower as a result. But Cramer thinks American investors should have paid attention to China, whose economy he said would take off when the Chinese government had cooled off its overheated property market. This appears to be happening, as the Chinese government loosened real-estate controls and forced land held by speculators to be built with homes for the middle and lower classes. As a result, the Chinese have once again taken the commodity markets by storm, buying copper, iron, coal, steal and oil.

"That's huge, bigger than any headline, bigger than any earnings report story," Cramer said. "While China can't replace employment growth in this country, it can change the tone of any market as we saw with sudden and sharp rallies in the Chinese plays."

Yum! Brands , the Kentucky Fried Chicken restaurant-chain operator benefited, as did copper company Freeport-McMoRan Copper & Gold , fertilizer dealer Potash and machinery plays in Bucyrus International , Joy Global and Caterpillar.

"It was a spectacular rally masked by downbeat US earnings headlines until it was so powerful that it just burst through," Cramer said. "If you played the misleading headlines, not only did you miss out on some incredible moves from the get-go in a host of tech and consumer stocks including Apple, but you lost out on a Chinese-related rally that turned around the entire market and took what should have been a miserable day for the bulls and transformed it into a very happy one."

When this story published, Cramer’s charitable trust owned Apple and Goldman Sachs.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

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