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.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV