What Bottoms Look Like
The national doctrine of Cramerica is that if it’s a sour market, hold off and do some buying on the way down, Cramer said.
While the “Mad Money” host won’t signal when it’s safe to come back in, he did explain what a bottom looks like, so investors have a sense of when to start pulling the trigger. Cramer said he was “the master of spotting bottoms” at his old hedge fund.
When the economy is getting worse, there can only be a true bottom when things stop deteriorating, he said. There will come a point when all of the bad news is baked into stock prices.
Wholesale capitulation is necessary for a “real, market-wide bottom,” Cramer said. In other words, people have given up and the sentiment is incredibly negative. The bulls need to have converted to bears. For empirical evidence of this, Cramer looks to the Investor’s Intelligence Survey, which tells you what percentage of all money managers are bullish or bearish. Cramer said 35 percent bulls is a necessary precondition for a bottom.
A real bottom, Cramer said, is what he calls a crescendo sell-off. At this point, nobody’s left to sell because everyone who could sell already has. In a crescendo sell-off, there is a dramatic disparity between stocks hitting new lows, usually 400 to 700, and stocks hitting their new highs, only a handful. Everyone will be panicking, Cramer said, like they had during the generational bottom of March 2009. Shortly thereafter, the market caught a 60 percent move from that level, so when it happens, don’t lose your head because “the buying opportunity of a lifetime may be at hand.”
The “single greatest tell” of a bottom, Cramer said, is looking at individual stocks. If a company is hit by a slew of bad news, but its stock doesn’t go down, there’s simply nothing left to phase shareholders enough to sell. At that point, Cramer would recommend aggressively buying that stock.
“When the economy’s tanking and the market’s going south, be careful, pull in your horns, and wait until you spot a legitimate bottom,” said Cramer. “But when it comes don't run from it, run to it, because that's when you can get the best risk reward to make the largest amount of money imaginable.”
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