Monitoring the 'Mad Money' Madness

I've been mulling over investor complacency for some time now, and Doug Kass' concerns last month heightened my interest in this area.

In case you missed it, Kass penned a piece comparing Jim Cramer to 1980's investment guru Joe Granville: "It is the immediate, frantic and unquestioning manner in which investors/traders respond to [Cramer's] ideas (not the ideas themselves) that is reaching silly proportions, and that has me unnerved, causing me to question whether the response to "Mad Money" is a microcosm of a market that has driven fear and doubt away and is ready for a fall," Kass wrote.

You can read Cramer's response here, but I wanted to see if Kass was correct. I was not disappointed in my hunt for signs of speculative excess.

First Sign: Blind Stock Purchases

In the Jan. 27 episode of "Mad Money," Cramer spoke positively about NMT Medical (NMTI Quote). In the aftermarket, the stock popped up to $22 -- a 34% gain!

But what was even more astounding was the postclose trading in Nuveen Massachusetts Premium Income Municipal Fund (NMT Quote) a closed-end muni fund with the symbol NMT.

"We watched in astonishment as traders mistakenly began bidding NMT up in response to Cramer's $100 recommendation of NMT Medical," observed Laszlo Birinyi's Ticker Sense. "Within 30 seconds, the closed-end municipal income fund ran from $15.50 to $22 on tens of thousands of shares for a gain of 46%! A closed-end muni bond fund! It stayed up for at least three or four minutes until everyone became aware that NMT was not the stock Cramer was talking about."

Talk about not doing your homework before buying a stock.

Note that the Nuveen Massachusetts Premium Income Municipal Fund typically trades an average of 3,500 shares a day; the case of mistaken identity saw the share volume soar to over 100,000 shares on the error.

NMTI vs. NMT

Source: Ticker Sense

Another example of the knee-jerk reaction to Jim's stock ideas comes from the recent Back-to-School edition of "Mad Money." On it, Jim recommended Bookham (BKHM Quote). The stock had been about $6.65, and the day after the recommendation, it gapped open nearly 25%, to $8.23, and traded as high as $8.49 that day.

Personally, I don't like to establish a position -- long or short -- on the day of quarterly earnings unless I have an edge; merely hearing a stock's name mentioned on TV hardly qualifies. But that didn't stop almost 25 million shares from changing hands on Thursday. On most days, the stock trades about a million shares. Making matters worse, the company missed the quarter and lowered its revenue guidance for the upcoming quarter to a range of $51 million to $54 million from $58 million previously.

Early Friday, the stock was down 11% to $6.92. Everyone who blindly bought the stock yesterday is now buried in the position. (To Cramer's credit, he chastises viewers to do their own homework.)

As Doug pointed out, it's not the show (which can be quite entertaining), or even the stock ideas: Rather, it's the blind and unthinking leap into stock ideas without any due diligence.

Mesozoic Moments

I have long counseled against overweighting anecdotal evidence vs. actual data. The value of anecdotal evidence is that it should put you on notice to start paying close attention to the quantitative (see above). That said, consider prices of Cramer's "Mad Money" paraphernalia on eBay (EBAY Quote).

Now, the trading of these items are not what's the issue. What raises a red flag now are some of the eye-opening prices that these otherwise modest giveaway items are fetching:

Jim Cramer Talking Bobble Heads: Bidding over $100. Prior winning auctions of talking bobble heads went as high as $255.

The Red and Black Bulls and Bears: The winning bid for just the head -- the head! -- of a bull was $26.

The narrative is priceless:

"Straight from the CBNC studios, Jim Cramer's 'Mad Money' show official foam bull. In one of his passionate moments, Jim Cramer bit off the legs, horns, tail and threw this bull into the audience and I caught it. This is a must have for any fan of Wall Street or Jim Cramer."

Official "Mad Money" Jim Cramer T-shirt: bidding at $46.

"Mad Money" bling: in the form of a 14K gold "Mad Money" charm pendant -- won with a $149.99 bid.

Gauging sentiment is often difficult. Transitions in sentiment are often a subtle thing, and can be impacted by an observer's own viewpoint. The difference between caution and panic, between enthusiasm and greed, is often slight.

But when the unthinking, instinctual part of the brain takes over -- the ancient reptilian brain -- speculative excesses often occur. For investors, finding these "Mesozoic moments" on a timely basis can be quite profitable. For when the lizard brain is in charge, we are often very close to market tops and bottoms.