Understanding the 'Moronic Mechanics' of the Market
Stocks ended sharply lower on Wednesday, as oil prices tumbled. With the "rising cost of materials" no longer threatening companies' profitability, Cramer doesn't understand why stocks fell. If anything, the "Mad Money" host said stocks should have ended higher.
"The market isn't always rational. It's often inefficient. Sometimes it's just plain wrong ... sometimes the action simply doesn't make sense in terms of the fundamentals of individual companies or the whole economy," Cramer explained. "That's why on "Mad Money" we seek to see through the action for what it really was."
Wednesday's action was caused not by the fundamentals, so much as market mechanics, Cramer said.
Cramer has long argued that oil futures were being kept artificially high by hedge funds, who bought futures with borrowed money and bet the futures would go higher. He has argued that, if the exchanges that trade in oil simply made it more expensive (known as raising margin requirements), oil prices would fall. CME Group, the world's largest commodities exchange, raised margin requirements on Wednesday. Shortly thereafter, oil prices tumbled. Cramer said that shows margin requires are working, so that the real market price—not the artificially-inflated price created by speculators—can suffice.
Increased margin requirements led to lower oil prices, which will now lead to lower gasoline prices, Cramer said. Lower oil prices should have helped the market rally, but it didn't. Instead, stocks fell. So why is the market being so stupid?
"There are so many people playing with margin in stocks, in currencies and in commodities that whenever one of these groups gets hit, it causes selling in all of them," Cramer said, adding that selling begets more selling. "Once this kind of forced selling starts, we don't know when it will end."
Cramer thinks the selling will take oil down to $90 a barrel. With lower oil prices translating into lower gas prices, he thinks consumers will have more money to spend and so retailers will profit. At the same time more people might be eating out at restaurants, so Cramer likes Darden . Lower raw costs should also help chemical names Dow Chemical and DuPont , he added.
"Start your buying as the moronic mechanics of the market drive these stocks lower than where they should be given that the economy's going to get stronger, not weaker," Cramer said.
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