Mad Money

The ripple of 'cult stocks' in the market rally

Cramer: This was a Netflix day

Some ascribe Wednesday's market rally to the possibility that the European Central Bank will jumpstart Europe's economy on Thursday. Others pinned it to Obama speech about soaking the rich on Tuesday evening. Not Jim Cramer. He said the rally was born on the back of one measly stock—Netflix.

It is completely ridiculous that one stock could mean so much in the gigantic U.S. stock market, but that is just what a cult stock like Netflix did.

"Netflix is an odd bird, one of those stocks that people want to own because they love Netflix, the service. There's nothing the matter with that. I just find it hard to value, which is why I call it a cult stock," said the "Mad Money" host.

Cramer refers to what he calls "cult stocks" as those stocks that do not trade on revenues or earnings. They trade based on sexy press releases, or in Netflix's case, on new subscribers and new releases of Orange is the New Black" or "Marco Polo."

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Cult stocks are popular because people consider them cool to own. When one goes up, they all trade up together in a group. This is the reason why Cramer does not consider Netflix to be a tech stock. It is a cult stock along with Amazon, Tesla and GoPro.

For example, if an investor called into the Am I Diversified segment of "Mad Money" to ask about portfolio diversification, and they owned Time Warner and Netflix— Cramer would see no problem with this. He considers these two to be very different animals, with Netflix being a speculative cult stock and Time Warner as part of the broadcasting cohort.

Or how about Tesla? This stock should have been down on Wednesday based on the price target reduction from Morgan Stanley after the debacle in China. Cramer also finds Tesla hard to value because it's heavily shorted, and investors own it based on how snazzy the car is.

But if an investor had both Tesla and Netflix in a portfolio, the "Mad Money" host would object. These two cult stocks trade together, such as when Tesla rallied $4.64 alongside Netflix on Wednesday.

Netflix made it very clear to explain that it is not another Amazon, as it is looking to generate actual material profitability by 2017.

"You think you would ever get a declaration like that from Amazon? No way! They're looking for material spending! That's what Amazon lives for," said Cramer.

Yet, it doesn't matter, because Amazon was also up 2.7 percent.

Same story with GoPro, up 6.2 percent! Cramer considers GoPro to be a total dog, ever since the insiders got out of the stock in the post-IPO lockup. But it didn't matter in the cult rally.

Read more from Mad Money with Jim Cramer
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"Netflix inspired trepidation among many a keen-eyed pessimists. At the same time, it emboldened people to come back to some of their old favorites," Cramer added.

And that's just the way a rally is created. With good, solid earnings creating some much needed optimism.

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