Ho John Lee's Weblog

Global financial markets are linked more closely than ever. Here’s a crib sheet of a few markets of interest and their opening/closing times in Pacific Time (US West Coast).

There are often interesting interactions at major market open and closes, especially during the overlap between the US market open and European market close. In addition, US index futures, particularly the ES (S&P 500 e-mini futures) also trade nearly around the clock, closing only for daily settlement between 4:15 and 4:30pm US East Coast time (plus weekend and holidays).

Note that many Asian markets have morning and afternoon sessions, and close for lunch. Different countries also observe differing practices with respect to Daylight Savings Time, so the relative timing may change seasonally. You may find it useful to check with a World Clock for the current times. Also remember that Asia begins it’s week on Sunday evening in the US, and is closed for the week by the time it’s Friday in the US.

A cautionary tale gets added to market lore. This is going to make a good movie at some point…

In one of the banking world’s most unsettling recent disclosures, France’s Société Générale SA said Mr. Kerviel had cost the bank €4.9 billion, equal to $7.2 billion, by making huge unauthorized trades that he hid for months by hacking into computers. The combined trading positions he built up over recent months, say people close to the situation, totaled some €50 billion, or $73 billion.

Mr. Kerviel is no trading legend who let a transaction get out of hand. He was a low-level trader in the bank’s “Delta One” desk in western Paris, earning about €100,000 ($145,000) a year. His job was to make bets on how large European stock indexes would move, according to bank officials. His expertise was trading baskets of stocks such as the Euro Stoxx 50.

At $7.2 billion, this loss is larger than than the estimated 2006 GDP of 65 of the 183 countries tracked by the World Bank. It’s just about the entire output of Cambodia ($7.193 billion), and greater than the combined output of Seychelles, Liberia, Grenada, Gambia, Saint Kitts and Nevis, Saint Vincent and the Grenadines, Samoa, Comoros, Vanuatu, East Timor, Solomon Islands, Guinea-Bissau, Dominica, Micronesia, Tonga, Palau, Marshall Islands, São Tomé and Príncipe, and Kiribati ($6.846 billion).

I’ve noticed that the news coverage keep reporting “fraud”, which is apparently true (he made up fictitious trades with outside partners of the bank), but it mostly sounds like internal risk controls failed in more than one place.

Of course, if it had gone the other way and turned a profit, we never would have heard about it.

Looks like no one was impressed by Bernanke’s non-intervention on Thursday and the Bush/Paulson send-everyone-800-bucks stimulus package. US markets are closed for Martin Luther King Day, but the rest of the world is open, and down hard. DJ futures are showing something like -520 for tomorrow’s open, around 11586. The NYSE circuit breaker rules don’t kick in until a 10% move (1350 points), which would be somewhere around 10740. (The thresholds get reset every quarter.)

Don’t think we’ll see that tomorrow, but the way things have been going recently, it’s not out of the question. I wouldn’t be surprised to see a last-ditch central bank intervention tomorrow morning before the open, either. I think they missed their chance on Thursday, but I also don’t think the Fed has the luxury of waiting until the official FOMC meeting January 29 for their next move.

Here’s a graph of the open interest in Sep07 SPX options. Unlike your typical equity option which settle based on opex Friday’s close, most index options settle based on the opening value of the S&P 500 index on expiration Friday.

This leads to interesting dynamics like last month, when Ben Bernanke cut the discount rate just before the market open on Friday. A lot of fund managers went to bed Thursday with good looking option positions that got crushed Friday morning when S&P 500 components gapped up at the open.

Thursday SPX cash closed at 1518.75. I come up with around 1490 for max pain. (“Max Pain” is the settlement value that will result in the lowest aggregate value for the open contracts at expiration.) This, and the big run up since the unexpected 50bps rate cut on Thursday, suggest a lower bias going into tomorrow’s open, which we would see in the futures. ESZ7 (December S&P futures contract) closed Thursday at 1531.75.

Part of what makes the index options settlement interesting is that the settlement value is based on the opening trades in each of the components, and they don’t all open at the same time. It takes a huge amount of money to move the entire market around, but you can jack the futures up or down, along with selected issues in thin premarket sessions to induce a higher or lower opening cross in your preferred direction. I don’t generally attempt to take a trade based on max pain alone, but it can be useful to know where some pricing anomalies may occur. On SPX, the institutional-sized interest tends to fall at multiples of 25, i.e. 1475, 1500, 1525, which is easily visible on the graph. If the opening price gets moved to a strike, there can also be an opportunity to fade the gap, as the trade gets unwound.

The rate cut on Tuesday resulted in a lot of excitement and probably an overdone level of buying. So there are some other reasons we might see prices come in on Friday. However, it looks like the “Bin Laden Trade” (many, many Sep07 SPX 700 puts) isn’t going to expire in the money.

Barry Ritholtz points out the new community sentiment feature, part of the new front page for Yahoo Finance.

Stock message boards are a fascinating place to scan through from time to time, containing a mix of informed, uninformed, and sometimes deliberately misleading posts. On average, the post volume and prevailing sentiment is probably a good contrary indicator. Part of what makes stock message boards interesting is the sheer volume of misdirection and general noise. At the same time, there are a smaller number of board posters that contribute more than blind cheerleading or bashing their chosen stocks.

I spent some time a while back looking at trying to automate the process of scanning the Yahoo Finance boards for “informed” or otherwise actionable message flow, but concluded that the project wasn’t worth the effort unless I was working for Yahoo. Some of the process I was considering would have been to determining a reputation value for messages and contributors, partly based on historical outcomes and partly based on user-generated ratings. The last revision to the finance message boards incorporates a simple rating system, but what I was looking for was the ability to see the ratings from a trusted set of users, and the ability to rate the posters, and perhaps their likely context (long term holder, swing trader, or intraday trader). The other piece would have been to implement some backtesting on the various sentiment indicators to see whether it had any trading value at all.

The sentiment indicator is being generated by Collective Intellect, which says:

Using proprietary algorithms, Collective Intellect’s Media IntelligenceTM service filters and ranks bloggers and posts, so you only see the most credible sources of information — and only when it’s relevant to your trading strategy.

I think it’s much easier to deal with analysis of the financial bloggers than the stock message boards and chat rooms. It will be interesting to keep an eye on how this new feature works out.

Both CNBC and TheStreet.com have separately reported problems with their respective stock trading contests.

The CNBC contest site apparently had a coding flaw that allowed traders to open an order entry window before market close, then wait until after hours to actually enter the order, which would be executed the closing price.

The more interesting comment from CNBC is this:

In addition, there have been allegations that one or more contestants may have engaged in illegal market manipulation to affect actual prices of stocks represented in their contest portfolios.

With a million dollars at stake, this seemed like a plausible scenario even before the contest started. It’s unclear to me whether “illegal market manipulation” here actually means “illegal under contest rules” or “illegal under SEC regulations”, but it seems quite feasible.

Along similar lines at TheStreet.com, which offered $100,000 in their contest:

The final results of the game indicate that players employed trading strategies to achieve returns that could not be duplicated in the real world, thereby depriving other contestants of an equal chance to win.

I don’t know why these large contests don’t just partner with a retail brokerage that already has a paper trading (“demo”) mode instead of building their own. Wouldn’t solve the market manipulation problem though.

See also:

• BusinessWeek – CNBC’s Easy Money
• Insufficient volatility to win
• Not bad for real money, but not enough for paper trading

Since last February’s market gymnastics, I regularly take a glance at the wacky Shanghai market in overnight trading to see if that particular financial asteroid will be landing in the morning. This evening I noticed that the free quotes on the US Yahoo site lag the quotes on the China Yahoo site:

Here’s the Shanghai market as seen on the US site:

Here’s the Shanghai market as seen on the Chinese site:

In both cases, they’re free, delayed quotes, and are correctly time stamped. I never noticed that the overseas Yahoo sites provide more current data for the local markets before, though. Now you can all impress your non-trading friends with your nearly psychic ability to call intraday turns in the Shanghai market.

It appears I didn’t win the CNBC stock contest, ending up at +30%. The leading portfolios were something like $4-5MM, so there is a huge spread in that top 2% bracket.

I’m currently in the top 4% at 14746 in the CNBC contest. Oddly, they don’t publish the portfolio values on their website, but did show the current portfolio values and standings on TV last Friday. The top positions are clustered around $2M, or a total return of around 100%. It would be interesting to know what the distribution of 1-week returns looked like. That’s probably the best opportunity for placing at this point.

In either case, I haven’t hit any 25% to 50% movers, which looks like a prequisite for placing in the standings so far.

It’s hard to find high volatility stocks that are likely to move up in this market. I made a little progress on the CNBC stock contest, but this is going to be a lot lower tomorrow when they update the results (seeing how the markets had another abysmal day). It would be a lot more interesting if you could take short positions. Everyone would probably be in NEW and LEND.

As an aside, the rules for the trading contest apparently don’t prohibit multiple accounts owned by the same person. Consequently, someone named “Nancy Beaumont” has entered hundreds of portfolios. By the rules, they can only win once, but having multiple high-volatility portfolios in the running significantly improves your chance of ending up with one or two successful outliers, sort of like buying multiple lottery tickets, but with much better odds. At the moment they’re occupying 8 of the top 20 rankings.

CNBC is running a stock trading contest starting today, with a prize of one million dollars for the best performance by May 25th. Signing up is free. Each participant gets a notional $1,000,000 to trade. There are a few non-obvious rules:

• All trades are priced at end-of-day – no intraday trades, and no GTC limit orders.
• No ETFs – this means no indexes, countries, sectors, or commodities, and no inverse trades
• No mutual funds – again, no indexes, country, sector, commodity, or inverse vehicles
• No options, futures, or other derivatives
• Minimum market cap of $500 million as of the starting date – this is probably to keep people from winning by manipulating a thinly traded microcap stock.

In order to win this type of contest, you pretty much have to treat it like a free lottery ticket and make your selections accordingly. There is no risk-adjusted return to consider, and no downside to taking extreme losses. So on a short timeframe, and in a long-only US stock portfolio, you’re looking for something highly speculative that’s going to move a lot.

Before I read the rules, I was thinking that with a million real dollars at stake, someone would game the system by thrashing a microcap issue back and forth, but the $500MM market cap requirement makes it harder. Not out of the question, but probably not worthwhile for anyone in a position to control the stock price.

Since we can’t trade the easily manipulated microcap stocks, I’d look for low float, heavily shorted small cap stocks that have some positive opportunity for event or news driven movement. Some general areas to look:

• Biotech development companies that have regulatory approval or conferences coming up
• Despised companies that are potential buyout candidates
• Disaster / event driven companies, such as avian flu, anti-terrorism, or whatever you can think of
• Fad driven trades. Last year it was ethanol and energy drinks. It might be ethanol and alt-energy again this year

These are all exactly the opposite of good investment or trading approaches, but the contest has a binary outcome – either you win or you don’t. By taking on extreme levels of portfolio risk, you’re trying to increase the variance of portfolio returns during the contest period, in hope of coming up with the highest outlier by the end.

A contrarian approach might be to stay in cash or very conservative stocks, and hope that everyone else makes speculative bets that crash and burn.

Hmm. I just looked at the rules again, and they also have $10,000 prizes for each week’s best 1-week return. This actually increases the incentive for finding a more-or-less binary, news-driven trade each week (such as earnings, court ruling, regulatory approvals). If it works out, your portfolio goes up. If it goes down, it doesn’t affect your 1-week return for the following week.

I was going to run a scan for this over the weekend, but perhaps I should try to dig something up for this week in case something works out.

Needless to say, this isn’t how one should invest or trade with real money.

Got a relatively weak bounce today after yesterday’s excitement.

Here’s a look at today’s market heat map after the close. There’s a lot of green, but this was pretty unenthusiastic.

I wasn’t too impressed with John Thain on CNBC today explaining yesterday’s weirdness with the NYSE trading and reporting systems. The official story seems to be that the systems that compute the DJIA got backlogged with transactions, and separately an internal messaging system for floor traders also got backlogged, so they’re upgrading their servers. Today they had to delay closing a number of stocks to allow transaction queues to clear at the end of the day. Thain mentioned a volume of over 20,000 msgs/second. This is all plausible, but not reassuring. It sounds like something that would happen to a growing e-commerce site, not one of the world’s largest stock exchanges. I wonder how much reserve throughput they can actually deploy. If we get a “real” market crash, they’re going to have to handle a lot more than the 2.4 billion shares they traded yesterday.

Update Thursday 03-01-2007 0616 PST – Premarket looks pretty messy this morning so far.

Today was a notable down day for most investors. This is a snapshot of the WSJ’s market heat map after today’s close, as monochromatic as I’ve ever seen it. (Update – see TraderMike’s recap of the intraday trading.)

It’s interesting to observe that diversification across asset classes and markets didn’t help you today. All 30 Dow stocks closed down. 99 of 100 Nasdaq-100 stocks closed down. Nearly all of the S&P 500 closed down. Oil, gold, and other commodities closed down. Emerging markets closed down. Basically, equities and commodities got sold, and the proceeds went to cash and bonds. (Update – here’s the summary from today’s Worden Report: “Zero Industry groups advanced while 239 declined. There was one winner in the Nasdaq-100, two in the SP-500 and zero in the Dow. HalfPoint+ Movers were seven against 2174. The Leadership Index was 34 versus 2228.”)

One nominal trigger for today’s selling was a 9% drop on the Shanghai exchange, but there have been any number of reasons to be concerned and raise a little cash for a while.

In general, diversifying an investment portfolio across asset classes and markets reduces overall risk for an equivalent level of returns. This works because the price behavior for different markets is supposed to be relatively uncorrelated over time. Lately, disparate markets have been more correlated than in the past, mostly going up. Today the risk was clearly to the down side, making it likely that your investment portfolio closed lower today, unless you were in cash or bonds. (I’m pleased to have reduced my trading positions in India and China over the past couple of weeks.)

Another unexpected systemic risk exposed today was in the odd behavior of the NYSE around 3pm. The new hybrid (electronic and open outcry) trading system was apparently getting backed up due to heavy order flow this afternoon. The DJIA appeared to gap down by 180 points when the backlog was cleared. Anyone trading intraday off a NYSE data feed probably had some problems. (Update – here’s TraderMike with more detail)

I think the price action today is overdone, but I’m also happy to have exited many of my positions in India, China, and other emerging markets over the past few weeks. This is a good time to think about where to invest after the dust settles, or focus on short term and day trading. (Some of you may be interested in using the Ultra and Ultrashort ETFs.)

I don’t usually track options closely, but the volume in Garmin (GRMN) calls caught my eye this afternoon. The December 35 and 40 and January 17.50 through 35 calls had volume 10x the prior open interest today.

The December 40’s did 25492 contracts at roughly 8.75, while the January 35’s did 17699 contracts at roughly 13.75. Yesterday there were only 2557 Dec 40 and 2523 Jan 35 contracts open. There’s comparatively little volume in the December/January put contracts.

This is around $46 million for these two strikes alone, and unusual new contracts volume in the other strikes today represent nearly $100 million, so it’s not likely to be a bunch of retail investors on OptionsExpress.

A few possible explanations:

1. Someone thinks GRMN is going up a lot between now and January (perhaps anticipating a good holiday season and/or announcements at CES in January?) and purchased a lot of calls.

2. Someone thinks GRMN is going down a lot between now and January and sold a lot of calls to effectively go short and also collect the time premium.

3. Someone holds a lot of GRMN shares and wants to lock in returns for the end of the year by selling covered calls. The shares are up around 45% for the year, someone’s bonus may depend on keeping the gains through December, and the past couple of days could easily raise some concern.

GRMN has been a favorite among short sellers and traders all year and goes on and off the Reg SHO (naked short) list regularly. It often trades erratically and often shows unusual affinity for strike prices at options expiration, which makes it worthwhile for Garmin investors to keep an eye on the options. Today’s volume in Dec 40 and Jan 35s alone correpond to 4.3M shares which the option counterparty will probably be wanting to hedge, compared with today’s relatively light volume of 1.6M shares.

Along these lines, there’s an interesting research paper on options volume versus future stock prices.

Nothing directly actionable here, but worth keeping an eye on.

Disclosure: currently long GRMN.

Update 11-29-2006 10:41PDT – Tuesday’s high volume in Dec 40s and Jan 35s is not showing up in the overnight update of open interest, so it looks like the trade was closed out yesterday.

In the past ten years (1996-2006), the NAHB homebuilders index tends to lead the performance of the S&P 500 by 12 months. The index goes from is based on a survey of homebuilding companies views on current sales, the outlook for the next 6 months, and the current level of prospective buyer traffic. This month was the 7th monthly drop in a row, and is a 15-year low.

In the period from 1985 to 1996, there is no correlation between the housing and stock market, so this could optimistically be viewed as a temporary coincidence. On the other hand, asset class correlations have been going up for a while. Draw your own conclusions, but real estate prices, home builders, and mortgage lenders are clearly having a difficult time recently.

John Mauldin has pulled together some observations on the housing market in his newsletter this week, leading with the graph above from David Rosenberg at Merrill Lynch. (Free e-mail registration required, but worthwhile reading.)

Here in the Bay Area, real estate prices are chronically high, ranging from “insanely high” to just “overpriced”. Here’s the pessimistic view. At least you can live in your overpriced house if you have enough cash to support it. I know of at least one dot-com zillionaire who lucked out by overpaying for his house in cash before the crash. The house went from something like $6M to $4M, but his stock went from something like $100M to $2M.

More on the housing market from Barry Ritholtz.

Silicon Valley is built on optimism and entrepreneurship, but lately, most tech companies can do no good in the eyes of public market investors, who are presently in a mood to sell on no news, bad news, or even good news.

At the same time, private market sentiment toward investing in Web 2.0, online services, and consumer media and publishing appears to be positive.

Barry Ritholtz posted this investor sentiment graph, on which I’ve marked roughly where I think we are for “new web” startups versus public tech companies.

A lot of the problem with public tech company share prices is due to uncertainty about future prospects – a slowing economy, growing competition, increasing costs, and a general cloud of unknowable liability from options accounting issues. The actual businesses are often doing OK or even great, but investor sentiment has shifted, bringing down the share price. See BRCM, RACK, or NVDA for a few examples of what happens when you report a decent quarter without boosting forward guidance. Fewer people are willing to pay a 30 multiple for growth that may never come, or that may never have existed in the first place.

In contrast, there is still a lot of investor love for Web 2.0 startups and other “new” online services. Part of this reflects supply and demand — there are a lot of investable funds around, and it’s hard for a fund to invest a lot of money in small chunks.

There’s still a lot of excitement about the future of Web 2.0 et al, but it’s been feeling overdone for the past few months (“Digg is worth $60M“), without necessarily being over. On the other hand, I still get the impression that people here in Silicon Valley are still somewhere between denial (“It will go back up”) and fear (“What if it doesn’t”) with respect to the medium term prospects for tech stock share prices.

This investor sentiment graph and other graphs of economic cycles can also be found on the forecast page at Now and Futures.

Anyone think we’ve already hit a peak for Web 2.0 investments or a bottom for tech stocks? (I don’t.)

A couple of weeks ago, Apple Computer announced a better-than-expected quarter, and also mentioned that they didn’t expect any “material adjustments” to result from their stock options accounting investigation. Since then, the share price has been rocketing from the low 50s up to touch 70 today.

After the close today, they mentioned that they will restate earnings back as far as 2002 and will delay filing their 10-Q. Oops.

Reuters News, August 3, 2006

Apple Computer Inc. (NASDAQ:AAPL – News) said on Thursday it would likely need to restate earnings and will delay filing its quarterly report because of additional irregularities it found in its accounting of stock options and its shares fell 6.6 percent.

Apple also said in a SEC regulatory filing Thursday that all financial communications issued since September 29, 2002, should not be relied upon. The irregularities are related to the issuance of stock option grants made between 1997 and 2001.

For reference, here’s the Apple 3Q06 press release, July 19, 2006:

As previously announced, an internal investigation discovered irregularities related to the issuance of certain stock option grants made between 1997 and 2001. A special committee of Apple’s outside directors has hired independent counsel to perform an investigation and the Company has informed the SEC. At this time, based upon the irregularities identified to date, management does not anticipate any material adjustment to the financial results included in this earnings release. However, if additional irregularities are identified by the independent investigation, a material adjustment to the financial information could be required.

At one point I used to believe in buy-and-hold, longer term investing based on fundamentals. Unfortunately, it can be difficult to discern what the fundamentals actually are, and how the stock markets will react to them.

In the current market conditions, I’m doing much better as a short term trader than when I try to hold longer term positions.

Update Friday 08-04-2006 14:33PDT – Interesting anecdotes on Apple financial culture from Applepeels.

It can be difficult to have a lot of confidence in financial statements published by publicly traded companies. Companies built on intellectual property or financial instruments are especially prone to varying interpretation of their finances, but accounting issues seem to plague companies from every industry these days.

This tale was posted by Wavesmash in the comments at Bill Cara’s site today:

Re: how can we ever trust any financial statements at all? An old joke an accountant once told me…

A business man was interviewing applicants for the position of divisional manager. He devised a simple test to select the most suitable person for the job. He asked each applicant the question, “What is two and two?”

The first interviewee was a journalist. His answer was “Twenty-two.”

The second was a social worker. She said, “I don’t know the answer but I’m glad we had time to discuss this important question.”

The third applicant was an engineer. He pulled out a slide rule and showed the answer to be between 3.999 and 4.001.

The next person was a lawyer. He stated that in the case of Jenkins v Commr of Stamp Duties (Qld), two and two was proven to be four.

The last applicant was an accountant. The business man asked him, “How much is two and two?”

The accountant got up from his chair, went over to the door and closed it then came back and sat down. He leaned across the desk and said in a low voice, “How much do you want it to be?”

He got the job.

If you’re an stock investor, you might be considering the possibility that the markets will go down (more) sometime in the near future.

The recently launched ProShares ETFs use derivatives to implement inverse and levered versions of several popular market tracking ETFs, including the Nasdaq-100 (QQQQ), S&P 500 (SPY), DJ-30 (DIA), and S&P Midcap (MDY).

The Short ProShares provide inverse performance to the underlying index, while the Ultra ProShares provide 2x the performance of the underlying index.

The performance doesn’t track perfectly. For example, today the Q’s are down by 0.88%, and the PSQ (inverse Q’s) are up 1.39% while the QLD (2x Q’s) are down by 1.66%. At the moment they also don’t appear to track intraday price movement very tightly, which might be a function of the relatively low volume. You can see the modest tracking divergence in the 5-min intraday chart above.

These aren’t the sort of instrument you’d want to hold for years, but could be handy for investors trying to hedge market risk (especially in self-directed IRAs, which don’t allow short selling). I also think a lot of people simply aren’t comfortable with short selling or derivatives, and this makes it much simpler for people to get short or lever up. If your account allows it and you’re already comfortable with short selling, it’s simpler and more efficient to just short the Q’s or other indices directly, though.

Prior to the ProShare ETFs, the Rydex mutual funds have been around for a long time, implementing inverse and levered index and sector funds. The main advantage of using ETFs here is that they trade continuously rather than once per day, making them more flexible as a hedging or trading vehicle.

Caution: If you have no idea what I’m talking about but are thinking about buying some because you think the market is going down, please don’t unless you check it out first and know what you’re getting. While the short and levered ETFs might be handy investment tools, they can just as easily provide you with a faster, easier way to lose your money if you’re not paying attention.

Disclaimer: Not investment advice. Trade at your own risk. Not affiliated with ProFunds or Rydex. You buy it, you own it.

Update Wed 07-12-2006 13:50PDT – Took a look at these today during market hours. The thin volume results in relatively wide spreads, 0.10 or more. I haven’t tried them yet, but Barry Ritholtz has written a note about his experiment with the PSQ (inverse Q’s), with mixed impressions.

Update Thu 07-13-2006 16:42PDT – Proshares introduces 2x inverse ETFs for the Q’s, S&P, DJIA, and S&P400 starting today – QID, SDS, DXD, MZZ. They picked a good day to launch.

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.

1. The hard way is to jump on the trade after hours, trying to buy a few lots before the price spikes.
2. 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,