It wasn’t always like this. Back when Cramer first started trading in the 1980s, stocks were valued according to the underlying company. The share price depended on things like earnings, cash on the balance sheet, revenues and profit margins. But during that decade, stocks began to be lumped into giant baskets that mimicked, say, the S&P 500. As a result, stocks became an asset class that at times traded together in lockstep, regardless of their positive or negative prospects.
This practice spread from country to country, Cramer said, and it turned stocks into commodities that were traded by contract with futures or exchange-traded funds. But then hedge-fund managers got involved and changed the whole game.
Hedge funds were able to pool such vast amounts of money that they dwarfed individual stocks. They had so much cash that they could buy all the shares available of many companies trading on the market. And because futures markets are much bigger than the regular markets, these funds gravitated toward the former. In the process, they formed a groupthink mentality and started to trade in synch with each other based on the same indicators.Page 2 of 3 | Prev Page | Next Page