Hedge Fund Investor: 'Stupidity Is Not Cyclical'

When markets behave irrationally, a buying opportunity is born... If the irrationality send stocks lower, not higher.
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Some sectors of the economy are cyclical and some remain steady through peaks, valleys and troughs. 

But there's one constant in financial markets, especially large and highly liquid ones like the stock market: stupidity. 

"We have a saying in our place, which is that stupidity is not cyclical," said Keith Rosenbloom, Managing Member of Cruiser Capital, a New York based hedge fund. 

Essentially, stocks can be traded at multiples that are either too low or too high compared to their fundamental value at any time, regardless of where the economy is in its cycle. In the current environment, many stocks have traded down in the past few months, as investors dumped their holdings to end 2018, as multiple potential macroeconomic headwinds have taken hold. 

"This whole market dislocation has caused a lot of very fundamentally sound businesses to now trade at multiples they haven't traded at in a very long time, so from our perspective we think it's pretty exciting," Rosenbloom added. Of course, the market has rebounded some in January, but earnings multiples are still much lower than they were pre fourth quarter selloff. 

Rosenbloom noted that the majority of floor trading now is driven by algorithms, which largely do not flash buy or sell signals based on fundamentals, but rather 'headline risk' and other factors. 

See how algorithms may have impacted Johnson & Johnson (JNJ) - Get Report stock after news of its asbestos issue broke. 

Johnson and Johnson is a holding in Jim Cramer's Action Alerts PLUS member club. Members of Cramer's Action Alerts Plus club can watch Cramer's exclusive call on Thursday, Nov. 17.