Mad Money

This stock rotation could ruin your portfolio

Cramer: Dedicated money being shifted around

Every once in a while, Jim Cramer likes to go back to basics of investing to explain the market environment and its impact on the investor portfolio.

On Wednesday, the "Mad Money" host saw a large rotation in dedicated money. This is the money-management core principle stipulating that once a chunk of money has been allocated to a specific sector, it has to stay in that sector no matter what. The cash just gets shifted to different stocks within the sector.

Where is this money rotation taking place? Tech.

"For most of the last year, money's been pouring into what I call plain vanilla technology," Cramer said.

This group is an umbrella for the semiconductors that fuel industries such as auto, cell phones, computers and the big-ticket items that power businesses today.

Cramer saw that investors became dissatisfied with vanilla tech when both Intel and Microsoft failed to deliver the upside surprises that the Street expected in order for their stocks to keep climbing.

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Microsoft disappointed when it reported an uninspiring quarter with low guidance that failed to deliver on big things that investors expected. Even Cramer wanted to fall asleep during the company's conference call.

"It was like going to a movie where nothing happens. I found myself reading the label for the all-natural and organic rice cakes I was snacking on while I tried to combat that Lunesta of a conference call. Didn't work—I slept like a baby on the kitchen floor."

The big blow of the day, in Cramer's eyes, happened when Hewlett-Packard's stock was crushed, falling almost 10 percent on Wednesday. Hewlett-Packard, which reported earnings Tuesday evening, spans into vast regions of tech, covering networking, personal computers, storage and printers.

"And it was almost all bad. There wasn't anything positive that I could really hang my hat on, anything to make me want to stick around," Cramer said.

When money managers are disenchanted in a sector, like they were with tech this week, they don't leave the sector entirely because they still need to diversify funds. Instead, they just move into another segment.

That is exactly what happened and what defined trading on Wednesday. Cramer saw them flee the lower-growth value stocks, and flash flood into the higher-growth tech stocks.

These higher-growth stocks, such as Google and Facebook, were previously left in the dust by vanilla tech and had such slow growth that it was painful to watch. Now, they are being snapped up while investors abandon plays like Hewlett-Packard.

Other stocks that were part of the rotation that investors bought were Amazon, Netflix and Priceline.

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"Now, I have to tell you, don't get too complacent about the longevity of this rotation. We have an analyst meeting from IBM on Thursday, and if it tells a better tale than it did last quarter, we could see a reversion right back to old tech," Cramer added.

However, the "Mad Money" host thinks it is important to point out how quickly the market changes. If you don't do your homework and catch the rotations—your portfolio could see a seismic shift as well.

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