This sell-off was caused by a computer-driven ‘footrace,’ Jim Cramer says

Sell-off caused by computer-driven 'footrace,' says Jim Cramer

Sell-off caused by computer-driven ‘footrace,’ says Jim Cramer   11 Hours Ago | 01:10

As CNBC’s Jim Cramer watched stocks nosedive in Tuesday’s trading session, one thing became abundantly clear to the longtime market-watcher: it “was all about the rise of the machines.”

The major averages all fell more than 2 percent as a possible slowdown signal in the bond market and lingering trade fears rattled investors. The Dow Jones Industrial Average fell more than 800 points intraday.

Some attributed the dramatic declines to a lack of buyers, but Cramer already knew the culprits: complex algorithmic programs set up by professional money managers to sell when the odds of future market losses increase.

In other words, when an event that often precedes a recession occurs — in Tuesday’s case, short-term interest rates trading above long-term rates in a so-called yield curve inversion — some trading algorithms will automatically begin selling securities because the chances of an economic slowdown just got higher.

Cramer, host of “Mad Money,” drew a comparison with football. Some plays can seem very risky, but when you consider the percentage chances of them going right, there’s no choice but to implement them in the field. These programs make the same kind of calculation.

So, when the two-year and the five-year yield curves inverted on Tuesday, some hedge funds’ programs automatically sold the S&P 500, which tends to fall in times of economic weakness, and others automatically sold shares of the big banks, which suffer when long-term rates are lower, Cramer said.

“Why? Because historically, this situation has produced negative results for the bank stocks and these hedge funds are trying to get out ahead of others who fear those negative results but just don’t know they’re going to fear them. It’s a footrace,” he explained. “This curve, as they call it, overrides whatever you hear about good employment or consumer balance sheets or robust lending. It’s predictive.”

Worse, the charts are signaling more pain ahead: based on Cramer’s analysis, many hedge funds likely sold the S&P 500 when it dipped below its 200-day moving average because, in the past, that move tended to bring more downside.

“Here’s the problem: there are now so many hedge funds using the same algorithm, same programs [that] there simply aren’t enough investors willing to take the other side of the trade. If we all know that stocks go down on certain triggers, then who the heck would want to buy stocks?” Cramer said.

“That’s how you get a day like today, where the market goes into free-fall,” the “Mad Money” host continued. “When the percentages are against you and the algorithms are in charge, … nobody wants to try to be a hero and bet against them.”

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Cramer’s game plan: A week defined by trade talks and employment

Trade talks and the latest data on U.S. employment will color the week ahead for the stock market, CNBC’s Jim Cramer said Friday as stocks rallied on high hopes for a U.S.-China trade deal at the weekend’s G-20 summit.

President Donald Trump is planning to meet with Chinese President Xi Jinping at the Buenos Aires, Argentina gathering on Saturday to discuss what has amounted to an ever-escalating trade war between the two nations. Next Friday, a Labor Department report on U.S. job creation will bookend what Cramer expects to be an “exciting” week for stocks.

“Between Trump’s meeting with President Xi over the weekend and the employment number on Friday, there’s a whole lot going on next week. Let’s just hope it’s not too exciting,” the “Mad Money” host said.

With Saturday’s market-defining meeting in mind, Cramer turned to his game plan for the week ahead:

Monday: Coupa Software

Spending-focused cloud player Coupa Software reports earnings on Monday. The Federal Reserve’s slight step back from its initial plans for raising interest rates created a better environment for growth stocks like Coupa’s, Cramer said.

“Speaking of the Fed, I sure wish they’d start thinking not just about the raw data interpretation, but also about outfits like Coupa, which save companies a fortune … by cutting back on people — the most expensive part of a business — and allowing them to rely on software to handle procurement,” he said.

“That means all of these cloud-based enterprise software companies are inherently deflationary,” Cramer continued. “So [Fed Chair Jerome] Powell might want to listen in on Coupa’s conference call, which, by the way, I expect to be a good one.”

Tuesday: Dollar General, Autozone, HD Supply, Toll Brothers

Dollar General: Cramer expected a strong earnings report from Dollar General, which will issue its quarterly results Tuesday morning.

“The best-performing portions of retail this week were the bargain basement operations: Ollie’s, TJX and Burlington Stores. Dollar General fits that bill,” he said. “I see an upside surprise coming.”

Autozone: Auto parts retailer Autozone will also report earnings. Cramer is a fan of the company’s share buyback program, which he said was as good a reason as any to buy Autozone’s stock after its report.

“Even if the company delivers slightly off numbers, just a little bit of slippage, it’s usually a great buying opportunity,” he said. “These days, people are keeping their cars longer and longer, which means they need more maintenance and spare parts, a real boon to all of these … auto parts companies.”

HD Supply: HD Supply’s earnings will give Cramer a sense of how small businesses are faring in this country because the company provides industrial services to roughly 500,000 smaller-scale professional customers.

“It’s all part of the pastiche that I like to put together to take the temperature of the economy in real time,” he said.

Toll Brothers: Homebuilder Toll Brothers will add to that pastiche. Cramer expected the company’s earnings report to “tell a tale of both strength and weakness.”

“Remember, I’m not saying the economy overall is weak, I’m saying it’s weaker than it’s been, and one of the reasons is the slowing housing market,” he explained. “I bet Toll confirms my view, particularly on the coasts.”

Wednesday: Lululemon Athletica, Five Below

Two Cramer-fave retailers, Lululemon and Five Below, will report earnings on Wednesday. The stocks of both companies have been struggling of late, Lululemon’s “in sync with … the rebellion against high-priced apparel” and Five Below’s on worries about trade with China, Cramer said.

“I think both sell-offs are overblown at this point,” he argued. “However, I’m mindful of how hard it is to own retailers right now, [now] that people think the economy’s shifting to a lower gear.”

Thursday: Kroger, Broadcom

Kroger: The largest U.S. supermarket chain will also issue its quarterly results. The “Mad Money” host harbored concerns about the company’s slew of formidable competitors.

“While I think, certainly, that Kroger can spin a good yarn about remodeled stores, that merely makes it an OK house in a very bad neighborhood,” he said. “I’m going to have to say no, thank you.”

Broadcom: After Wednesday’s closing bell, investors will get results from chipmaker Broadcom. Cramer said there was a lot to be learned from the company’s conference call.

“I want to know about its quizzical acquisition … of a software company called CA that works with mainframes, not to mention the exposure to China, 5G and Apple, although the latter is not to be named,” he said. “At most, you make some cryptic reference, say, [to] a major customer. Still, there’s a lot to learn from Broadcom.”

Friday: Non-farm payrolls

On Friday, Cramer will be eyeing the U.S. Labor Department’s non-farm payroll report, which measures job creation and is a key indicator for the Fed when it comes to raising interest rates.

“I think it will give us our last strong set of employment numbers — because I think it’s tailing off — giving the Fed [the] justification … that it needs for one more tightening, December tightening, before it waits to see how its rate hikes have impacted the economy,” Cramer said. “Now that Powell has chosen prudence over dogma, there’s a good chance this once red-hot economy can get the soft landing that it so sorely deserves.”

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