Here’s why meme-stock fads are bad news for the Nasdaq

CNBC’s Jim Cramer said he was not shocked by the Nasdaq’s plunge on Monday, saying last week’s Bed Bath & Beyond trading frenzy indicated index weakness could be on the way.

On Monday’s episode of “Mad Money,” Cramer referenced two warnings he gave to CNBC Investing Club members last week regarding the potential for meme stock foam to spread through the market within the meaning of broad, especially the tech-heavy Nasdaq. These warnings were first issued Wednesday morning and then Friday afternoon. On Wednesday, Cramer cut two positions in his Charitable Trust to raise funds, citing the Bed Bath & Beyond fiasco as one of the reasons for making the defensive sells.

“The next time you see one of these meme stocks roaring, I want you to call the registry,” Cramer said Monday. “At this point, the Nasdaq is already down more than 6% from its highs of last week, so in some ways it’s too late to sell although I expect more pain. Better just worth buying as we get closer to the 12% decline where the pain tended to stop.”

Cramer reached the conclusion by looking at seven periods since January 2021, when a heavily shorted stock or group of stocks was raised by retail traders to levels disconnected from underlying fundamentals. The first instance of the dataset is the original GameStop frenzy in late January 2021, and the most recent example centers around the two-day monster move GameStop stocks had on May 25-26.

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Cramer said that in six of the seven meme stock resurgences he identified, the Nasdaq saw a significant pullback in the weeks that followed. Never mind that some of the biggest meme stocks, including GameStop and AMC Entertainment, aren’t even listed on the Nasdaq. While the severity of the downturns varies, he said on average the Nasdaq was down about 12%, the level at which Cramer suggested it might be time to put some cash to work.

“I know the connection might seem a bit tenuous to you. Why would meme stock rallies signal stocks are peaking? Because that’s a classic sign of foam. It shows you that the bulls are getting complacent and that speculation is rampant,” Cramer said.

Some of the selling pressure could be related to retail investors getting burned and deciding to steer clear of the market altogether. However, Cramer argued that the most important factor at play is how big market players react to the meme stock foam.

“When fund managers see this kind of action, they tend to give up and walk away a bit because they hate that stocks can’t be judged on fundamentals, even if they are stocks. that they don’t really care about,” Cramer said. “In other words, these meme stock spikes make the hedge fund guys feel like the inmates are running the asylum, so they decide to take some profit and maybe go on vacation for a week. “

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