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Cramer's 'Mad Money' Recap: Anatomy of a Short Squeeze (Final)

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NEW YORK ( TheStreet) -- "Sometimes stocks make no sense," Jim Cramer told his "Mad Money" TV show viewers Monday.

He said that sometimes, big moves in a stock have nothing to do with earnings, valuations or news about a stock. Instead, it's simply a matter of supply and demand.

Consider stocks like Whirlpool (WHR), Netflix (NFLX) and Green Mountain Coffee Roasters (GMCR), all three of whom have seen their shares rise day after day for seemingly no reason at all.

But Cramer said for those with inside knowledge of how the markets really work, these moves make perfect sense. In the case of Whirlpool, he said, the company has only 76 million shares of stock available. While that may seem like a lot, Cramer put the number into perspective by comparing it to the 4.6 billion shares that Exxon-Mobil (XOM) has.

Cramer explained that when a company like Whirlpool continues to disappoint investors quarter after quarter, it builds up a sizable number of short sellers. In the case of Whirlpool, almost 10% of the company's available shares were sold short ahead of its most recent release. So when Whirlpool not only surprised Wall Street with great earnings but also raised guidance, it caught all of those short sellers completely off guard an d on the wrong side of the trade.

What ensues is a classic short squeeze, explained Cramer, where hundreds of short sellers all look to cover their positions at the same time, only to find there are no shares available at the current price. So the price rises. As the situation becomes more and more desperate, the share price will continue to rise, sometimes day after day, until all of the short positions have been covered. Cramer said the situation is often made worse by retail investors, who are also looking to buy shares since the company now seems to be on the right track again.

Cramer said the same pattern can be seen with Netflix and Green Mountain. There is no news propelling these stocks, he said, it's merely short sellers looking to buy huge quantities of stock, only to find no takers. They'll continue to bid up the price, dollar by dollar, tick by tick, until they can cover their mistakes.

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