With so much attention given to The Daily Show’s Jon Stewart’s on-air bashing of CNBC personality Jim Cramer, it is interesting to look at a phenomenon known as the “Cramer Bounce”. Jim Cramer is the host of a hot-topic, stock recommendation television show called Mad Money and was previously the head of a large hedge fund called Cramer, Berkowitz & Co. Jon Stewart argued that Jim Cramer has a responsibility to the public given his power as a leading representative of the largest financial reporting channel on television. But how much power does Cramer actually hold? The Cramer bounce is a theory that the stocks that Jim Cramer recommends on his TV show will almost always increase the day after the show airs. The increase is attributed to Cramer’s reputation as a stock picking guru, his convincing theatrics and a sheep following the herd mentality.
|Jim Cramer vs. Jon Stewart|
Empirically, there are studies depicting the Market’s reaction to the Cramer Bounce. Notably, in January 2009, graduate students from the University of Pennsylvania published a report entitled Market Madness: The Case of Mad Money which claims that over time, the average next day increase for a stock that Cramer recommends is 3% for the entire study sample, and almost 7% for smaller cap stocks. They proved through the use of ECN’s that most trades came in after 7pm EST when Mad Money concluded. Another Study conducted by Northwestern University entitled Is the Market Mad?: Evidence from Mad Money published in 2006 showed that the average cumulative return on Cramer’s recommendation was 5.19%, but more importantly almost all of the increases were nullified within 12 days. Cramer argued that he is an entertainer and educator who does more than just recommend stock picks. But Stewart argued that his actions and recommendations seem to bear credence over a segment of investors who take his recommendations as gospel. It is hard to tell who is right and who is wrong but it is entirely plausible that the Cramer Bounce has some effect on the overall market. Use your How The Market Works account (if you don’t have one, sign up for free) to test some of his stock picks and that way, you’ll find out the truth while not risking any real cash.