Commodities Conundrum

The hedge funds are in control of the commodity stocks, Cramer said during Wednesday’s Mad Money, and they’re causing the sector’s erratic trading.

How else can you explain the fact that the price of commodities themselves went down today, while the stocks went up? The hedge funds right now wield such massive influence that these stocks have been completely separated from their underlying businesses.

So it makes it hard – even for a trading pro like Cramer – to set a buy-in price. There’s always a price. But Cramer’s wondering if the same forced selling that brought the financials down in July is now punching the commodity stocks. It sure seems like it. And he blames the hedge funds for making it near impossible to find the right entry point.

This is the kind of environment where a company like Freeport-McMoRan can lose 10 points in a heartbeat even though the business is incredibly strong. That’s why Cramer recommended that investors look to buy – if they’re willing – do so in wide descending scales.

Of course, that begs the question, what scale is wide enough? Even Cramer’s charitable trust missed on a recent buy of Foster Wheeler. The trust bought 100 shares at $40 then watched the price drop to $30. What that the right price to buy again? That’s a tough question for any investor, especially since FWLT fell yesterday more than any other stock on the Nasdaq 100. The trust decided to cash out, using Wednesday’s strength to sell at $35, and live to buy another day. But this is a perfect example of how hard it is to trade commodity stocks – and find the right buying price – in this environment.

(Oh, and Cramer’s still bullish on Foster-Wheeler. It’s a great company with a strong balance sheet, and it’s a very cheap stock. Now’s just not the time to buy.)

Right now you’re probably thinking that there’s no point to buying at all if the market’s like this. Why not just wait until this is all over? But then again, when’s that? Hence, the buyer’s dilemma facing all investors right now.

All money managers are following the same playbook right now: Commodities are going down, so sell commodities stocks and buy the companies that benefit from cheaper oil. That’s why names like Kimberly-Clark, FedEx and UPS are working but Foster Wheeler is not. And as money pours out of the commodity names, it makes it even hard to find that buy-in price.

Make sure you don’t mistake this massive selling for capitulation. Real capitulation only happens when all the sellers who want out of a stock are out. Right now all we have is gigantic hedge funds selling their entire positions at once, driving share prices down viciously. And there’s really nothing most of these hedge funds can do because they’re scrambling to raise money for redemptions. They’ve had a bad year and now their clients want their money back. So they’re dumping stocks to generate cash.

The only bottom that investors can trust, aside of a hedge fund selling climax, will come from the return of Chinese demand for commodities, or an Exxon Mobil , Arcelor-Mittal or BHP Billiton taking over a natural gas company, steel company or a mineral company, respectively, Cramer said. The market needs that kind of long-term view right now, and no one on Wall Street has it.

So until the hedge funds “finish selling or some buyers – real corporate buyers – come out of the woodwork,” Cramer said, “it’s not going to get any easier. And it simply may not be worth your effort, your time or your sanity.”

Questions for Cramer?

Questions, comments, suggestions for the Mad Money website?