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Trade against Jim Cramer
We document market inefficiency in the in the days following the buy recommendations of Jim Cramer, host of the popular CNBC show Mad Money. The average cumulative abnormal overnight return for the smallest quartile of recommended stocks is 5.19%, and these returns completely disappear within 12 trading days. We also find that trading volume, buy-sell imbalance, and short sales volume are all significantly higher than normal on the day following Cramer's recommendations. These findings allow us to test hypotheses about the behavior of different types of traders. Finally, our GMM estimates of the components of the bid-ask spread suggest that market makers are aware of Cramer's recommendations and anticipate the order flow imbalance following Cramer's recommendations.
Here is the paper.
Posted by Tyler Cowen on July 13, 2006 at 02:23 AM in Economics | Permalink
Comments
I agree. If you really want excitement, forget poker. Instead, go short
a small cap stock that will certainly be heavily borrowed and have real
demand behind it. Your mission: avoid the short-squeeze and the margin
call and make a daring escape after the price reverses. And hope this isn't
the one that doesn't reverse.
Seriously, I watch the show occasionally, and I've noticed that ever since
the Symbol (SBL) debacle Cramer now takes a lot more trouble to explain
to people what happens when they all go out and buy a small cap on
his recommendation. I suspect that this opportunity is already gone. That
doesn't mean the study doesn't still have a lot of value of course.
Cramer's easy to criticize on a number of grounds (he was just on TV a
couple of night's ago saying that the business cycle really isn't that
hard to grasp) but I've learned a lot from his writings. For instance, his
TSC column gave a spot on account of the LTCM crisis as it was unfolding.
As a blogger, I'd say he's rivaled only by Tyler. Too bad his real time
columns are very expensive now.
Posted by: Pat L at Jul 13, 2006 9:31:04 AM
A while back I did an unscientific review of some of his recommendations. He has all of his picks for each show on a website and I plugged a bunch of them from 6 months ago into a stock graphing program and he did alright.
Actually, as long as you were discliplined about cutting losses (say, cutting a stock loose after an 8% loss) he did pretty well.
Well, like I said, the sample size was fairly small and it was unscientific.
Posted by: Ian Lewis at Jul 13, 2006 9:38:03 AM
I've been hoping someone would do an in-depth study of his recs. Fascinating guy, nevertheless.
Posted by: Alex Ambroz at Jul 13, 2006 11:05:36 AM
I hope people don't take this guy too seriously. If you doubt me, check out his history during down markets. That is when a real stock picker would shine.
Posted by: Patinator at Jul 13, 2006 3:56:21 PM
There is also (unless enough money is already trading on it) a stat arb opportunity to buy on Cramer's recommendations when he makes them on his radio show and to sell a few hours later when they are announced on television.
Posted by: mobile at Jul 13, 2006 4:56:42 PM
http://www.booyahboyaudit.com/
This guy tracks and measures Cramer's picks.
http://www.booyahboyaudit.com/tools.performance.html
He's beating the indices, which surprises me.
Posted by: Johnny Debacle at Jul 14, 2006 10:17:36 AM
Another good site for Cramer perspective is www.madmoneymachine.com
It started as a fan site... but is not necessarily anymore. Great podcast, too.
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Posted by: levan at Sep 11, 2006 3:24:09 AM
The most complete evaluation of over 13,000 Jim Cramer stock recommendations.
Posted by: stocktagger at Apr 23, 2007 9:28:15 AM
I would like to massively short the phrase "spot on".
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