Mad Money

Cramer's lessons for trading the French election

Key Points
  • Jim Cramer says that if you want to profit from the French election, buy on the dip.
  • Hedge funds often kickstart the selling after foreign events because they trade on volatility.
  • Foreign events can cause global panic, but selling because of it is wrong. Instead, buy or hold.
Trading the French election

Ahead of Sunday's elections in France, Jim Cramer decided to take a look back at Brexit to see what investors can learn from major, volatility-prone foreign events.

First and foremost, the "Mad Money" host insisted that while individual investors should be aware of upcoming elections in France, Germany, and the U.K., acting on fears of negative results can be detrimental to their portfolios.

"We tend to read everything negative into European elections because of the market's initial reaction to Brexit and the shocking declines it caused around the globe, including here," Cramer said.

But looking closely at the market's actions post-Brexit, when U.S. stocks snapped back within a week of the event, it became clear to Cramer that hedge funds — those who live to trade, not invest — were largely responsible for the selling spree.

Watch the full segment here:

Cramer's lessons for trading the French election

"It's that same volatility that the hedge funds search for to make quick money. It's also why the headlines turn into such a loud drumbeat," Cramer said. "In retrospect, though, it meant very little, except as a panic, a panic that gave you a great chance to buy."

This happens often with non-systemic events that occur outside the U.S., Cramer said. Hedge fund traders are always on the lookout for trades to the downside, which often result in winning bets for the funds.

Still, Sunday's elections will undoubtedly move the needle in concrete ways for French businesses, especially considering two of the election's four front-runners.

"If the hard leftist wins, you probably don't want to invest in French businesses because of tax considerations or French bonds, because hardcore socialists tend not to care at all about the bond market," Cramer said, referring to Jean-Luc Mélenchon.

"On the other hand, if Marine Le Pen, the hard-right candidate, makes it to the second round and then wins the election, she said she'll take France off the euro, which would mean the end of the EU as we know it," he continued.

In both cases, U.S. bond prices rise and rates come down, Cramer added.

So, if investors are concerned about stocks in light of European elections, think about buying the downturn or simply holding your positions.

"Selling because of European politics has been a mistake endlessly," Cramer insisted.

If you do hold, know that hedge fund trading may drag stocks and interest rates down, and that the decline will not necessarily indicate a weaker economy.

"I say ignore that ridiculous bond-stock linkage and carry on looking for shares of high-quality companies that get knocked down to cheap prices by this nonsense," Cramer said. "Or please be ready to buy a low-cost index fund if things really get hit."

The bottom line is, as Cramer always says, "No one ever made a dime panicking. But loads of money's been made taking the other side of the panic."

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