Trading against Jim Cramer
My daughter and I sometimes watch Jim Cramer’s Mad Money show on CNBC. It’s great entertainment with the crazy camera angles, the chair throwing, and random literary references. She likes the sound effects (moo!), keeps asking if we can call in to “The Lightning Round!”, and occasionally asks if we can get some stock because Cramer said “Buy-buy-buy!”.
As the most popular show on CNBC, there is a significant phenomenon of excited viewers rushing out and buying whatever stock gets mentioned on each day’s program. If you watch after hours, there is usually a significant price spike, especially in thinly traded names.
The transient demand from Mad Money viewers creates two high percentage trading opportunities due to pricing inefficiencies, one hard to exploit, and one easy.
- The hard way is to jump on the trade after hours, trying to buy a few lots before the price spikes.
- The easy way is to wait for the opening price run up the following day, and sell short against the recommendation.
A recent paper by Joseph Engelberg, Caroline Sasseville, and Jared Williams at Kellogg School of Management examines the specifics of the Mad Money effect on market action in names that are mentioned. The tactic of short term trading against Mad Money recommendations is clearly visible in some of the illustrations.
Taken together, our results suggest that the aggregate losers in our event study are the Mad Money viewers who decide to buy the recommended securities when the markets open the following day, and that the winners are the market makers and arbitraguers [sic] who sell the overpriced recommended stocks on day 1, as well as the traders who sell the recommended stocks on days 2 through 12.
Individual investors who watch Mad Money would be wise to wait before purchasing the small stocks Cramer recommends, as these stocks tend to fall to their original levels following the overnight price spike caused by his recommendation.
I didn’t watch the show when it first came on, as it took me a while to get past all the yelling. I’ve come to think of Cramer as something like Howard Stern-meets-Louis Rukeyser, in that he has gotten a lot of people to watch by behaving strangely but also says some interesting things about investing as well. I still find it easier to read the transcripts than to watch the show.
There are a lot of people who have gotten interested in investing after watching Cramer on television. Hopefully they won’t lose their shirt before they figure out how to think before clicking. It’s probably been less disastrous for viewers in the past year, while markets have been generally going up.I’ve noticed he seems to be doing more basic investor education lately, specifically warning people not to run out and buy after hours or at the open.
Is the Market Mad? Evidence from Mad Money by Joseph Engelberg, Caroline Sasseville, Jared Williams
via Seeking Alpha
See also: Mad Money site at TheStreet.com, ShortCramersPicks,
Tags: stock, trading, markets, cnbc, jimcramer, research, kellogg
