Mad Money

Cramer explains how short-sellers drove the Nasdaq to its record high

How short-sellers drive the Nasdaq

After the Nasdaq posted a record close on Thursday, Jim Cramer realized that sometimes, it's all about unraveling the shorts.

"The net impact here is that when the shorts are wrong, they create a wave effect of fierce buying that's like a a huge burst of acetylene on an already-lit fire. That's a big part of what's been happening here with some of these huge market capitalization Nasdaq stocks that just seem to levitate almost daily," the "Mad Money" host said.

Short selling is a tactic by which traders sell borrowed stocks with the expectation of those stocks declining and generating profits for the traders from the loss.

Watch the full segment here:

Cramer explains how short-sellers drove the Nasdaq to its record high

Take Tesla, whose stock has been soaring of late. The automaker was a short-seller favorite in the past because of its desperate need for financing to reach its goal of producing 500,000 cars per year.

But in light of Chinese internet giant TenCent's $1.7 billion purchase for 5 percent of Tesla, the company is now sitting pretty.

"Case closed on the short side. No wonder the stock's been a rocket. The bears no longer have anything to hang their hat on and they're responsible for a great deal of this turbo-charged move," Cramer said.

Or look at Amazon, the e-commerce powerhouse that is spending all over the place and fueling its burgeoning stock price through innovation and efficiency.

"We basically want the company to grow revenues more than show profits and that's exactly what it's doing. This record-breaking move has been made on the backs of the short-sellers who thought, wrongly, once again, that Amazon's growth had finally begun to peter out," Cramer said.

Even Netflix hit an all-time high on Thursday after being knocked by the short-sellers for lagging growth, despite the company insisting that the bottom line hit came from a credit card error.

"The shorts have been hung badly" on Netflix, which is once again seeing a healthy acceleration in growth, Cramer said.

So while Cramer does not think shorting is a bad strategy, having practiced it for years at his old hedge fund, he does believe it can occasionally result in serious damage to companies, or in a surge of buying like we have seen in March.

"Some will call it a blow-off in these names. Me? I just say the shorts got the wrong side of the trade," he said.

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