CNBC’s Jim Cramer will forever remain a fan of diversification, which he calls “the only free lunch” in the business of investing, because of days like Wednesday.
“Days like this one show you why I find it so worrisome that stocks within the same sector often trade in tandem, in unison. We just don’t know which direction they’ll head in,” the “Mad Money” host said.
As fast-growing technology stocks got clobbered and retail, bank and transportation stocks rose, Cramer felt it was essential to break down the widespread rotation for investors.
The suddenly heightened changes of the GOP passing tax reform served as a boon for domestic companies, which would see taxes come down and earnings inch up as a result.
But, with the exception of massive players like Apple, which would be incentivized to repatriate money from overseas if taxes were lowered, positive tax news did next to nothing for the tech cohort.
“Remember, we don’t have new money flooding into this market, so if money managers want to buy the winners, they’ve got to sell the stocks of companies that don’t benefit as much in order to raise that cash,” Cramer explained.
And it’s no secret that tech stocks, particularly cloud- and semiconductor-based names, are “scorching,” he said. That would explain why investors grew concerned and started selling stocks in the group after software company Autodesk’s disappointing earnings report and bitcoin’s increased volatility.
At the same time, as positive tax reform news flowed out of Washington, investors turned a kind eye to companies with down-and-out stocks that would benefit from successful tax reform.
“So what happens now? Okay, stocks are a little like camping,” Cramer said. “Imagine you’re in the woods with your friends and a bear stumbles into your campsite, clearly hungry for some delicious human porridge. You can’t outrun the bear, but you don’t need to — you just need to outrun your buddies.”
That’s what’s happening with Wednesday’s sellers, who sprinted out of tech stocks to get a leg up on their peers, the “Mad Money” host explained.
“That’s why I always say you have to wait until the end of the second day of a sell-off before you do much buying,” he said. “So let me give you the bottom line on this sell-off. Is it one that we consider garden-variety? Wrong question. Are there stocks of companies that appeal to you that are finally reaching your prices? That’s what you’re looking for. And when you find them, you can buy a little, but leave room to buy even more if or when they go lower.”