Cramer: Momentum stocks to fall much further?
(Click for video linked to a searchable transcript of this Mad Money segment)
If pro investors have shunned any type of stock, they've shunned so-called high multiple momentum stocks.
Once of great interest to investors, momentum stocks have recently fallen out of favor, with money managers cashing out their significant gains. (Cramer believes a large portion of that money, in turn, is rotating into value stocks.)
But what matters here, is that the selloffs in momentum stocks have been significant, and Cramer knows you may be wondering how much more they should decline before they rebound.
Considering the declines are significant, shrewd investors may even be wondering 'should I buy the dip?'
"If you're asking yourself that question, I'm afraid you're not going to like the answer," Cramer said. "If history is any guide, then the high-flying biotechs, Internet plays, and of course the cloud-based software-as-a-service stocks, could still have a long way to fall."
Cramer came to that conclusion after consulting with top technical analyst Tim Collins, who noted similarities between the current decline in momentum stocks and the dotcom collapse back in 2000.
Collins found that patterns among stocks such as Cisco, Priceline, JDSU, Amazon, ICG and Akamai in 2000 appear to be similar to patterns that are currently emerging in the momentum stocks of 2014.
"You can see the same pattern in names like LinkedIn, HiMax, BioMarin and Yelp as well as FireEye, Workday, , Channel Advisor and " Cramer explained
Therefore, Collins believes that looking at the charts immediately after the dotcom collapse could foreshadow what lies ahead for many momentum stocks, here and now.
And, as you can see from the "Dotcom Bust" chart above, what followed after the collapse wasn't good.
Collins says companies that gave up the ghost in 2000 failed to bounce back for quite some time. Therefore, he thinks buying the current decline is not advisable.
"Granted, companies like Amazon and Priceline did eventually recover, but that took many years to unfold, and before they managed to rebound, they stayed in the house of pain for a very long time," Cramer added.
Of course, that begs the question—how can you tell when a company has given up the ghost? There may be momentum stocks that don't belong in this category.
According to Collins, there's a reliable metric. Looking at the charts of Amazon, JDSU, and many others from back in the 2000 era, he saw the following pattern emerge time and again.
When a red-hot momentum stock fell below its 40-week moving average, it didn't come back. There was no bounce. After momentum stocks fell below that level, they flat-lined, sometimes for years.
Therefore Collins tells Cramer that once a 2014 momentum stock falls below its 40-week moving average, you absolutely must not buy it.
Again, that metric is so important it bears repeating.
Collins believes that any momentum stock that's fallen below its 40-week moving average will not bounce. His chart work suggests that coming back from that kind of decline can take years and years.
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Cramer is a fundamental investor but he also thinks that Collins' analysis may be prescient.
"Not all stocks are the same," Cramer said. If you can identify a tangible catalyst that could drive shares of a profitable momentum stock higher, those stocks may break the pattern.
Otherwise, "I think you need to accept that the once-loved momentum stocks have become falling knives, and it's foolish for you to try to catch them," Cramer said.
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