Mad Money

Cramer: Critical sign coming for momentum stocks

Stock value goes a long way: Cramer

(Click for video linked to a searchable transcript of this Mad Money segment)

On Monday momentum stocks bounced with bulls sweeping in and buying the group broadly.

Jim Cramer thinks the price action could be telling; especially with a bellwether catalyst coming in the days ahead.

Part of the turn, Cramer says, has to do with the depth of the decline in momentum stocks over the last 3 months. Although they continue to trade at high multiples, many are significantly cheaper than they were in the winter months.

And on Wall Street price is a relative matter.

"For example, when I see Yelp fall from $101 to the low $50s, I know that stock is being put on sale. Sure I realize I still have to pay a premium and accept the multiple, but it's nowhere near the premium I would have paid just a few months ago," Cramer said.

Therefore, Cramer thinks money managers, who specialize in growth, just couldn't resist the relative bargain.

Then, other bullish catalysts came into play including fear of a short-covering rally, a decline in IPOs and a technical pattern which suggests these stocks are at a point of inflection.

All told, on Monday, momentum stocks had every reason to rally.

The question, however, becomes is the turn sustainable? Or is it a temporary bounce in a bigger move lower?

Last Resort | Digital Vision | Getty Images

"I believe we will know the answer to that question on Wednesday morning when we see the reaction to the quarter reported by," Cramer said, a stock that's widely considered a bellwether for momentum.

To understand why Wednesday is so important, investors must first look backward at how the momentum meltdown began. "It started in February when beat on the top line and raised revenue guidance," Cramer explained.

Although the stock rallied after the bell it plunged the next day. The Street took the price action as a sign that despite the strong results, investors were no longer willing to pay an even higher premium for Salesforce.

In turn, pros then sold other momentum stocks fearing they too could no longer support their multiples.

The ripple generated a broad decline.

Now, with Salesforce reporting earnings on Wednesday, the price action immediately following results could be quite telling, again.

"If Salesforce can reverse direction and start going up after it reports, I believe many other stocks will follow it higher," Cramer said, just as they followed Salesforce lower 3 months ago.

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"And if the stock goes higher on the quarter I believe you are going to see a huge surge in all of the usual suspects: Concur, ServiceNow, Tableau Software, Workday, and Medidata. It could extend to the beaten up biotechs, 3-D printer names and the highly speculative fuel cell plays, too."

All told, Cramer thinks it comes down to Salesforce.

"Sometimes you need to let the tape tell you what to do. Right now we don't know. But after Salesforce reports, I think we will."

Call Cramer: 1-800-743-CNBC

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