Cramer: Wall Street short-sellers are losing because they're overestimating the trade war

  • Hedge fund managers are looking at the U.S.-China trade war the wrong way, CNBC's Jim Cramer says.
  • The "Mad Money" host explains why short-sellers of China-related stocks are getting crushed.
  • On Monday, the president placed a 10 percent tariff on $200 billion worth of Chinese goods.

As stocks shrugged off trade war fears on Tuesday, with the Dow Jones Industrial Average surging over 180 points, CNBC's Jim Cramer could imagine how some Wall Street hedge fund managers were feeling.

"Many of these fund managers are kind of paranoid. They see systemic risk all over the place where it doesn't exist," the "Mad Money" host said.

"Every time a country in Europe or Asia struggles with its currency or its banking system or its finances — we're talking Turkey, Greece, Cyprus — these guys decide it's an opportunity to short stocks," he continued. "Every new tariff begets another reason to bet against the market."

But the shorts don't seem to be working. Hedge fund managers that have bet on stocks like Boeing, which sells one in four of its airplanes into China, going lower because of the U.S.-China trade spat haven't exactly won out, Cramer said.

Instead, short-sellers have watched their strategies unwind because investors just don't seem eager to sell their holdings, a crucial piece of short-selling strategy, the "Mad Money" host said.

Throw in the money flowing into the market via index funds and new retirement portfolios being formed thanks to strong employment, and the shorts have a real problem, he warned.

"As long as these buyers are there, it's very hard for the short-sellers to win," Cramer said. "If you're going to short stocks, you need someone to panic so you can buy back your stock ... at a lower level. That's just not happening. Every time, the short-sellers end up being overwhelmed by these index [fund] buyers."

That is the main reason stocks managed to rally Tuesday, even after President Donald Trump slapped 10 percent tariffs on $200 billion worth of Chinese goods and China retaliated by announcing tariffs of its own on $60 billion of U.S. products, Cramer said.

"Short-selling [has] become too darned difficult," he argued. "When I was running my old hedge fund, I always had to have some shorts on, and I'd often have huge bets against various sectors. It worked for me."

Whether or not it'll work for today's money managers, at least those betting against China-related stocks, remains to be seen.

"Because of the tidal wave of new money coming in and the incredibly large corporate buybacks, ... the shorts seem almost never to get a break. They don't get the kind of sell-off they're hoping for," the "Mad Money" host said. "Instead, we get a rally that only became stronger over the course of the session."

"The glass-all-full gang just can't stop buying, and unless there's a specific piece of negative news, a real shortfall, this market simply isn't delivering the kind of declines that used to make being a short-seller so darned lucrative," he concluded. "That's why stocks seem to be so resilient and why the market keeps defying the odds."

WATCH: Cramer's reasons for the trade-war-defying rally

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