Futures Vs. Fundamentals

There’s a tug of war going on in the market, Cramer said during Thursday’s Mad Money, between stock fundamentals and futures.

The fundamentals in this market are painfully clear: Unemployment’s on its way up, earnings estimates are too high given business conditions, and most likely the last good quarter your favorite company reported was the last good quarter your favorite company will report for quite some time. So no one wants to own individual stocks.

But at the same time, stocks as an asset class have become cheap relative to other asset classes like gold, real estate and bonds. As a result, money is pouring into futures such as the S&P 500. And it is this trend that is pushing the market up even though the outlook for the companies underneath is pretty grim, at least for most of them.

So the market wants to go higher because it’s fallen so far, but the fundamentals of individual stocks are so bad that simple finance demands they go lower. On a down day, you can tell the fundamentals won out. On an up day, it’s the futures that were in control. And if you want to make money, Cramer said, you have to suspend belief in individual stocks and ride those futures higher.

  • Watch the video to find out how pension funds are fueling this trend.

Example: U.S. Steel. Here’s a stock that’s fallen $165, with analysts downgrading it even before it reported its third quarter Wednesday and a forecast that was less than upbeat. But the stock went up anyway because it’s part of the S&P. The analysts were right to cut estimates, Cramer said, but they misjudged the asset class’ reverse gravity effect.

Cramer expects this trend will continue, and there’s no indication of which side will win. But at least you now know how the market can work even though individual stocks shouldn’t be owned.

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