Follow the Money

The Federal Reserve released the particulars of its bank “stress test” on Friday, leaving bears with one less reason to short the market. The bears were hoping the test would prove too lenient, and therefore ineffective, or that the government would demand certain weak banks had to go. But that didn’t happen.

Instead Fed Chairman Ben Bernanke – Cramer believes Treasury Secretary Geithner had a hand in this as well – issued a statement saying that all banks needed to raise more capital. That killed the leniency theory. At the same time, there were no threats of imminent shutdown; no institution drew Washington’s ire. So the shorts had no one to target. As a result, they lost even more footing today. The plan, as Cramer called it during Friday’s Stop Trading!, was “brilliant.”

So played out one of two conflicting views ruling the markets. Hedge funds seem to think stocks are too expensive, having rallied over the past seven weeks. Mutual funds, on the other hand, say stocks are still cheap relative to their longer-term highs. The mutuals are winning because they have more money at their disposal.

Mutual funds look at Ford and see a stock trading for half of what it fetched a couple of years ago. Hedgies see a stock that just doubled. The same goes for Whirlpool . And a similar story can be seen in Fortune Brands , Microsoft , Bank of America and Schlumberger .

The hedge funds’ bearish stance is going cost them clients, Cramer said. Investors are going to want to know why these funds are short when the market is in bull mode, and that will cause a capital shift en masse to mutual funds. After all, why pay fees that amount to 1% to 2% of assets plus 20% of returns to a hedge fund when you can choose a mutual fund that charges only 1% of assets?

Follow the money, Cramer said, because that money is going to the bulls, not the bears. And that’s why the market keeps trending higher.

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