Mad Money

How Big Money Rules the Markets

At some point during a big market rally, Cramer said Wednesday, the fundamentals of the money-management business outweigh those of publicly traded companies.

Fundamental Differences

Often times these funds have missed the move, and they’re scrambling to scoop up every share they can. This action ends up controlling the market because the funds have so much buying power.

Something similar happened in 2009. Because of a terrible few months in the market – from September through February – the big money managers had shifted their holdings to cash and other defensive plays. But then the Dow roared upward starting in early March, leaving these managers behind. Fearing the loss of clients, and their jobs, they opened their coffers.

Money managers compare their performance with key benchmarks, such as the S&P 500, and falling too far behind the benchmark can cost them their jobs. That in turn kicks up their survival instinct and sends them rushing to the market to buy stocks. Managers by that point are in such dire straits that they have to buy whatever’s available. The funds start bidding at the slightest dip in share prices leads, and this buoys the market overall.

“When we’re in extremely bullish territory,” Cramer said, “expect pullbacks to be short-lived thanks to all the hedge-fund and mutual-fund buying they create.”

Managers desperate for equity exposure can’t afford to take profits on what little they have, either. So whether up or down, the stock supply is holding firm or shrinking. Given the volume the funds can generate, that pushes the market higher and higher, even on days when we’d expect it to be down.

Cramer recommended watching for a year-do-date 10% increase in the S&P 500. That’s the point at which money managers will be forced into the market. Anything less than that they can explain away as a rounding error, or maybe they tell their clients the gains don’t warrant risk in chasing them. But double-digit increases in the S&P clear away any excuse making. The clients will want to know why they’re not taking part in that rally.

The bottom line is that stocks will trade better than expected because of money managers’ buying. Just as panicked sellers push a bear market even lower, funds will take stocks higher in a bull market.

“Don’t be surprised if rallies become self-fulfilling and stocks have trouble staying down,” Cramer said. “That’s just the panicked hedge fund and mutual fund managers desperately buying stocks in order to catch up with the averages.”

Call Cramer: 1-800-743-CNBC

Questions for Cramer?

Questions, comments, suggestions for the Mad Money website?