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Investment

Cramer: What to do when stock moves stop making sense

CNBC’s Jim Cramer has noticed a lot of action in the stock market recently that, in theory, shouldn’t be happening.

“This is a market that seems to have suspended nearly all of the ordinary rules that we go by. Things that aren’t supposed to happen have been happening at a faster pace than at any time I can recall,” the “Mad Money” host said. “So many stocks are behaving incorrectly, at least compared to the long-held hedge fund playbook.”

With interest rates heading higher and several rate hikes by the Federal Reserve expected for 2018, Cramer argued that the worst stock group in the market should be housing.

When short-term interest rates rise, borrowing costs for loans become more expensive, so people trying to secure new mortgages could fall under financial pressure. That could deter others from taking out loans for new houses or cars.

But when Cramer looked at the charts, homebuilding stocks were some of the best performers when it came to the new-high list.

From the broader housing exchange-traded fund to mortgage insurers like Radian to homebuilding staples like Toll Brothers, the market has pushed a slew of housing-related stocks higher regardless of the companies’ fundamental performance, Cramer said.

“The hedge fund playbook says we should be shorting these stocks aggressively at this point in the cycle. And look, I believe the playbook will be right eventually,” Cramer said. “However, you don’t get this kind of rally unless something good is happening, and when I go over the homebuilders, I come up with three things that could be driving the bus.”

The first point is that interest rates are still historically low, so the market might not have to worry about them for another 100 basis points of the rally, the “Mad Money” host said.

Cramer’s second point was that homebuilders took advantage of the 2008 recession to buy land. Now, demand for plots to build on is intensifying, driving stocks higher.

Third, home prices are rising faster than their building costs because of high demand, so homebuilders’ gross margins are raking in gains.

“If that’s the case, then the homebuilders can be bought right into the teeth of the next rate hike, although I’d wait to see who the new Fed chairman is before you pull the trigger,” Cramer advised. “I think any of the candidates other than [current Fed Chair Janet] Yellen would make the bulk of money managers start worrying about faster rate hikes.”

To Cramer’s surprise, utility stocks are also performing much better than expected considering the anticipated rate hikes.

Typically, utility stocks get pummeled in the face of rising rates because more investors turn to bonds for conservative, high-yielding equity investments (in a low-rate environment, utility stocks can serve this purpose). Also, utility companies have notoriously high debt, and their borrowing costs go up in tandem with rates.

Cramer came up with two reasons for the group’s non-sensical action: strength in the U.S. economy, which he said could be driving demand for utilities, and merger activity in the space.

Finally, the “Mad Money” host noticed that bank stocks are unusually strong. While higher interest rates could mean more profits for the banks, if they go too high and invert the yield curve, it could put the economy back into recession, he said.

But historically, the market tends to rally right before the yield curve inverts, and banks often benefit from this kind of action.

“One of the biggest challenges for money managers is that this market’s no longer following the patterns established by history. But in a real bull market like this one, we make exceptions to the playbook and we ‘rally to the occasion,’ so to speak,” Cramer said. “In the end, it’s happening, it’s true and it’s making a mockery of the bears who’ve told us endlessly that these stocks simply should not be going up right here, right now. Well, that’s exactly what they’re doing and that’s all that matters.”

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Source: Investment Cnbc
Cramer: What to do when stock moves stop making sense

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