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Cramer's TheStreet.com TV Recap: A Case of Options Hangover

TheStreet.com Staff

After "a big week" last week, the market is experiencing a phenomenon called "options hangover," Jim Cramer said on TheStreet.com TV's Wall Street Confidential video Webcast Monday morning.

Wall Street Confidential host Aaron Task asked Cramer whether the fact that the market is not moving much, despite a lot of recent M&A activity, is a sign that the market is getting tired.

Cramer chalked up the lack of action to this options hangover phenomenon, which tends to last from 9:30 am to 1:00 pm EST. It occurs, said Cramer, because market players who have call options are always hoping that Monday will be a day that'll bring good news. These investors exercise options, get common stock and tend to be margin players, Cramer said. If there is good news between 9:30 am and 1:00 pm, these players "kick it out."

However, this pressure usually abates by mid-afternoon, especially on Mondays because this is the day when mutual funds put a lot of money into the market, he said. The hangover in the morning and then this offset of incoming money usually produces "a bountiful afternoon," Cramer continued.

He said the market has seen this "hangover" phenomenon taking place since May of this year, when the Federal Reserve last raised rates. Cramer said he knows it tends to "freak people out" when the market doesn't respond to good news, but advised them to give the market "a chance."

The High Cost of Investor Hesitation

Task commented that it seems the retail and mutual fund investors haven't gotten into market with both feet. Cramer agreed that this is the case, but he also said it's due to "rational" behavior on the part of investors. When Chase offers 5% on a checking account and CDs are 5.5%, some people might consider leaping into the market to be a mistake, he said.

"I would tell these people that the market isn't stupid and it's waiting for them to come in as the rates come down," Cramer said. "You will have to pay higher prices this time next year."

With rates coming down, M&A activity, ample liquidity and great corporate earnings, Task asked Cramer what he would tell people who believe this is as good as the market is going to get.

Private equity firms just started bidding on these companies and "it is pretty obvious that this is the new game," Cramer said.

Further, the combination of the fees that companies like Goldman(GS Quote) are making, the returns from the private equity companies, the huge amount of cash private equity firms have and must put to work, and a bond market that is "desperate for any type of high yield," makes him believe this is not as good as it gets and any move to leave the table now will be "premature."

People who consider this market a bubble remind Cramer of those market players who said there was a bubble in real estate in 2003, he said. Even though it is true that the real estate sector was in a bubble during that period, it lasted another two years, Cramer said.

Moreover, he believes people should "stay away from the industrials," as investors are headed toward "chicken" cyclicals. For those market players looking to get into industrials that aren't going to blow up, Cramer urged people to look at Honeywell (HON Quote) and Boeing (BA Quote).

What people are missing is that the Fed doesn't cut on a weaker economy, it cuts on a crisis," he said. "I believe the crisis is going to be with Ford (F Quote)."

Although Cramer said he likes Ford's CEO Alan Mulally and what he's trying to do at Ford, he "can't believe that it will pull out of this tailspin without the government's help."

Even though the automaker recently raised more than $18 billion, Cramer believes Ford will go though that money "pretty quickly."

Ford doesn't have to "go belly up," for the Fed to cut rates, he added. "All the Fed has to do is see that Ford is critical" and it would cut rates, Cramer said, which he believes would help Ford because it has short-term financing.

He also said he "loves the fact that is subprime is blowing up," another factor which should get the Fed to cut rates.