Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Thursday, February 8.
The Dow went down another 4.4% on Thursday. While some are blaming the inflation or bond yields or Washington, the fact is that the crash is similar to that of 2008. "The real culprit behind today's decline is the same miscreant that's weighed us down for the last couple of days: the unspooling of these obscure products that allowed idiotic money managers and neophyte investors to bet against what's known as volatility," said Cramer.
Traders were caught on the wrong side in 2008 using margin to buy risky mortgage debt. Same trades happened this time as traders were on the wrong side of trade by betting against volatility. The margin calls led to forced selling that brings the entire market down.
"These leveraged volatility derivatives are coming back to haunt traders with rise in volatility." Cramer said there are 17 products that allow investors to bet against volatility. "Now they're all imploding. I swear, some of these dopes never learn. The current situation is like a similar version of what happened in 2008 after hedge funds levered up, borrowed money to bet on mortgage-backed bonds," said Cramer.
The market will bounce back once the liquidation of these funds is over. The only stocks that are working in this market are the ones that report drastic earnings surprises. Twitter (NYSE:TWTR), GrubHub (NYSE:GRUB) and Nvidia (NASDAQ:NVDA) are such examples that went up on good earnings.
"We don't know when things will get placid again, but until these traders get wiped out, finding winning stocks will be like finding a needle in a haystack. That's why I say you want to identify high-quality companies and use the weakness to scale into them gradually on the way down, betting that the VIX madness will end at some point," concluded Cramer.
Who is responsible?
Cramer dug deeper to find out what funds are responsible for the stock market implosion. His research reveals four funds that are responsible for the meltdown. "They're all a mouthful, but you know what? I owe you the whole truth and nothing but the truth, even if you actually need a rocket scientist to figure some of this out," said Cramer.
The VIX index was made to gauge the fear in the market. For 2017, VIX remained low. This led to rise of leveraged trading vehicles that short the VIX. "Now, it isn't enough sometimes on Wall Street to just own volatility or bet against volatility. Brokerages know people crave real juice, particularly hedge fund managers, so they invented stocks that allowed you to get twice the gain of the VIX on a given day, or get twice the loss of the VIX if it goes down on a given day. These instruments are the proximate cause of the madness you are now seeing," said Cramer.
ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA:UVXY) is an ETF that doubles the performance of the S&P 500 VIX Short-Term Futures Index every day. There were a lot of fund managers that short the instrument due to low volatility in 2017. With spike in volatility, they were caught off-guard and 110M shares were traded on Thursday. "There are some very big funds that have bet against this thing and they have to raise cash to stay short it. They can either end the pain and buy it back, or cover their call shorts, or they can just keep wagering by putting more and more of their money by selling stocks or selling S&P futures to raise money," said Cramer.
The other three funds are iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX), VelocityShares Daily 2X VIX Short-Term ETN (NASDAQ:TVIX) and ProShares Short VIX Short-Term Futures ETF (NYSEARCA:SVXY). SVXY goes down when VIX spikes as it did on Thursday. There were millions of shares traded on these funds as traders had bet against volatility.
When the volumes on these and 12 others dry up, it means that market can return to normalcy. It won't go up again immediately, but the market will be clean enough to trade in a sane manner.
Cramer continued the selloff strategy session by answering viewer calls.
Recommendation in the healthcare sector? Cramer suggested buying AbbVie (NYSE:ABBV). He also likes the three companies who are trying to reinvent healthcare - Berkshire Hathaway (NYSE:BRK.B), Amazon (NASDAQ:AMZN) and JPMorgan (NYSE:JPM).
Care about individual stocks
Cramer said when all the volatility vanishes, individual investors will start caring about individual stocks again.
One such stock is WestRock (NYSE:WRK) that acquired KapStone Paper (NYSE:KS) for $4.9B. The scale matters in the paper industry and that's what WestRock gets with this deal. It is not only eliminating a competitor, but will also impact the industry which will lead to increased margins.
Cramer thinks International Paper (NYSE:IP) is also a good stock to buy on weakness.
Viewer calls taken by Cramer
Home Depot (NYSE:HD): If you need the money in the next three months, take some off the table. Otherwise, the stock is good and should be bought around $170.
World Wrestling Entertainment (NYSE:WWE): They have a lot of fans. Hold on to it and buy some more if it goes down 10%.
Get Cramer's Picks by email - it's free and takes only a few seconds to sign up.