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Cramer: Beware! Expensive earnings season mistakes

Cramer: Costly earnings season mistakes

Yes, the averages all rallied on Tuesday, but that didn't stop Jim Cramer from wanting to scream. The action he saw in the markets was destructive as investors made snap judgments that led to stupid decisions.

"They might as well call it mistake season for all the ridiculous moves people are making," the "Mad Money" host said.

Cramer went down the list of stupidity he saw to show just how costly these earnings season mistakes can be.

JPMorgan, Wells Fargo and Johnson & Johnson all reported on Tuesday and the action in their stocks had a level of lunacy that told Cramer that the people trading them were totally clueless. But the one that really took the cake of craziness for Cramer was JPMorgan.

JPMorgan reported a magnificent quarter with $6 billion in profits, a large cut in branch expenses and 27 percent increase in its equities business year over year. Yet somehow the stock opened down 37 cents.

Absurd! Cramer saw that it opened down because of a report that said big gains from tax benefits. Yet he knew that if investors had done their homework, they would have recognized there was a great number staring them right in the face.

A gas flare is seen at an oil well near Williston, North Dakota.
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Sure enough, all of a sudden after the conference call investors finally cross-referenced research and came to the conclusion that even without the tax benefits, JPMorgan delivered a fantastic quarter and the stock flew higher. Investors who sold it on Tuesday morning were kicking themselves.

As for Johnson & Johnson, Cramer recommended that its CEO take a chapter out of the book from Celgene when it bought Cramer-fave company Receptos for $232 per share in cash. It is time for some radical action with Johnson & Johnson, such as a split to break the company up into three divisions of consumer, devices and pharma.

"Congrats to all who bought Receptos after my endless recommendations and interviews with CEO Faheem Hasnain, who has done such a great job for shareholders, as has Celegene CEO Bob Hugin for that matter," Cramer said.

And it wasn't just the earnings that drove Cramer crazy; it was oil, too. On Monday night, the eve of the big nuclear deal with Iran, Cramer kept hearing rumors that as soon as the deal was signed oil would plummet.

"I couldn't stop wondering, do any of these so-called experts understand how the market discounts things ahead of time?" Cramer asked.

As a result, oil had one of its worst slides in history in anticipation of the signing of the Iran deal. Yet while the negotiations were difficult, the results were never really in jeopardy. And of course, oil ended up rallying hard instead.

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Cramer sees this kind of foolishness all the time when investors trade based on what they read in headlines, and the headlines do not portray an accurate picture of what is happening. Key metrics are ignored, but they always matter in the end. Commodities plunge in advance of major events and then rally after the big event.

That's just how it works.

So how can investors prevent themselves from being fooled in the future? Cramer said the first major thing to know is not to trade based on headlines. Even the pros will fumble when they play the earnings headline game. And certainly do not bet on a commodities decline after a predictable event.

"Now that earnings season is upon us, I'm urging you to figure out what metrics matter and recognize that headlines are often classic misdirection plays," Cramer said.

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