Mad Money

Putting the Rumor Mill to Work for You

Whether selling short or focusing on the long term, traders never hesitate to float rumors to move their stocks. But sometimes this can backfire, as we saw for a few financial companies today.

There was talk on the Street that CIT Group , MBIA and Wells Fargo were going to suffer because of the recent troubles in the subprime industry. Short sellers had already rumored down some of the more low-hanging fruit – accredited home lenders and the like – and then decided to go after anything related to mortgages. In truth, there is no reason to believe these companies have the kind of subprime mortgage exposure that the rumors indicated.

Cramer knows the market is at the end of a bear raid when quality stocks start being rumored down. That’s how it worked in every bear raid he has ever traded. It’s how he knows that today’s rally was not ephemeral, and that many of the financials have bottomed.

Cramer said the market would bottom in thirds, and right now we’re seeing the bottoming of the second third. There are a lot of reasons the financials hit bottom today, the comments from Hank Paulsen not to fret too much about the subprime issue, and, sure, the market was “due” for a recovery. Even still, Cramer thinks that a lot of it had to do with cocky short-sellers.

Rumor-fueled bear raids happen because of a combination of groupthink and what Cramer considers recklessness couched in the form of prudence. Everyone loves to extrapolate to the downside: “Doesn’t every company that has loans, be they prime or subprime, get hurt here?” That’s the kind of sloppy thinking that could have kept you out of today’s action.

And sometimes even the media’s prudent skepticism is just recklessness in disguise. The media believes it has a duty to be cautious, a duty to not point out opportunities, and emphasize the negative. But there are times when it is irresponsible to be overcautious because the opportunity cost is so great.

The prudent thing, most of the time, is to see a decline like we experienced last week as a big sale and be on the hunt for stocks that work.

Bottom Line: The second third of the market, the financials, are bottoming and on the rebound. Don’t let recklessness disguised as caution keep you out of the game in the future, or you’ll miss more rallies like we had today.

Questions? Comments?