NEW YORK (Real Money) -- Can a clueless market be gamed? Can a market that makes bizarre correlations like this one let you in to make money? I say yes to both questions. But, first, you have to accept the stupidity of the daily judgment of the markets before you pull the trigger.
Let's start with the central premise of this market: the primacy of hedge funds over everything and everyone else. All of you out there, including mutual fund managers and index players, you mean nothing. You are nothing. You are captive and hostage to the hedge funds. We are pawns in the game.
This means you are captive to the judgments that their machines make, again, as silly and as wrong-headed as they are, because they manage much more money than you and make decisions every day in order to outperform every day.
So let's start with premise No. 1. When oil goes down, sell the whole market first, ask questions later. Hedge funds enter inputs into machines: bonds, the dollar, the Fed, 200-day moving averages and commodities. The machines spit out game plans. One of those that seems all-important is oil. When oil is down, the majority of the programs say that the S&P 500 should be down.
This is where it gets interesting. Common sense will tell you that oil going down is actually good for the vast majority of companies. That's because oil acts as a tax both on businesses and the consumer. Therefore, when oil goes down, the bottom lines of the companies and your budgets are affected positively.
However, the energy renaissance in this country has changed the dynamic behind the decline in oil. Suddenly, rather than being a net beneficiary, the machines presume that it is a net negative because lower oil from these levels sets back the renaissance. Although there are 34 states that are pure takers of oil, there are 16 states where energy is a principal source of the growth in employment.
So the immediate supposition follows: The economy will slow and many companies will fail because oil's going lower. The failed companies include the stretched oil companies with drilling budgets dependent upon oil that is much higher than where it currently stands. As oil goes lower, there will be more and more failures and a reversal in employment.
Not only that, lower oil is viewed as a sign that the economy is slowing down, which will then hurt profits and cause shortfalls that the stock market has not yet priced in. It doesn't matter than oil might be going lower because of all the oil that's sloshing around in the world -- OPEC hasn't come back, and we keep pumping. The presumption is entirely that the demand side is very much in doubt. If that's the case, then China must be falling off a cliff and Europe must be rolling over. So you have all of those worries right in our faces.
What happens when you get that weakness? Pretty simple: Interest rates go down. Why not? There must be less demand than we thought. So, therefore, bonds will go higher and, of course, interest rates will go lower. It happens every time.
Now, after you get oil down, stocks down and rates lower, you know what happens? Individual hedge funds and mutual funds that aren't run by machines come in and figure out the true beneficiaries of lower oil, the companies that actually benefit from lower oil. And then they buy those stocks.
Some of the buyers try to meld cross currents. They try to figure out who benefits from lower oil prices but doesn't need consumer demand to stay strong for fear that the machines are right and the economy is slowing. How about PepsiCo (PEP) - Get PepsiCo, Inc. Report ? Kimberly Clark (KMI) - Get Kinder Morgan Inc Class P Report and Procter & Gamble (PG) - Get Procter & Gamble Company Report ? They all use oil to make their products from the ingredients inside to the packaging outside. They burn gasoline to get their products to market, and their products are bought even if the economy gets weaker. Their dividends, in the meantime, exceed the coupons you get on bonds, which means they are superior bond market equivalents. And, in the case of Procter, management is slaughtering sacred cows, such as Duracell, in order to make more money. That's not the same old Procter, and the stock keeps going higher.
A second group of buyers is a little more bullish than these consumer staple buyers. They think that the lower price of gasoline will fall right to the bottom line of some industries that are economically sensitive, namely the airlines, which are doing quite well with the lower gasoline prices, as we learned last week when we saw their earnings. Their profits should be even larger as their largest cost goes down.
Lumped into this group are the package delivery companies, United Parcel Service (UPS) - Get United Parcel Service, Inc. Class B Report and Federal Express (FDX) - Get FedEx Corporation Report . Their numbers are going to be huge under this theory, and they are furiously breaking out.
Now, the real risk-takers believe that the original sellers, the ones who think that the economy is weak as judged by the declining price of oil so you have to sell everything, are just dead wrong. They buy the companies that benefit from lower commodity costs and will get more customers because the customers will have more spare change. That's how you get Chipotle (CMG) - Get Chipotle Mexican Grill, Inc. Report and Darden (DRI) - Get Darden Restaurants, Inc. Report going higher. They are natural beneficiaries of the "few more dollars in the pockets of consumers" theory.
But there are others who believe that if oil is really getting shelled, then that's a sign that economic activity isn't just slowing down, it is really decelerating. What are these people doing? They are buying the drug companies, particularly Gilead (GILD) - Get Gilead Sciences, Inc. Report and Regeneron (REGN) - Get Regeneron Pharmaceuticals, Inc. Report , which are amazingly strong. This makes sense in a real slowdown. As exemplified by oil going down, perhaps the only things that must get bought are the life-saving drugs of the biotechs. Plus, their growth will be amazing vs. all other companies where growth will be impinged.
In addition, there are also buyers of companies that report good numbers. Seagate (STX) - Get Seagate Technology Holdings PLC Report reported an upside surprise and that has moved the disk-drive companies. Micron (MU) - Get Micron Technology, Inc. Report followed up on its fabulous earnings by announcing a billion dollar buyback. It's all good for this kind of technology.
Of course, I think that this whole game is insane. You pick stocks based on prospects for the future. You try to buy stocks of companies that are doing better than the average company but people don't know it yet. Or maybe you buy companies that have strong fundamentals where you think there will be self-help or takeovers. You can be opportunistic in this environment.
But make no mistake about it. The moves you see are all derivative of hedge funds that are making bizarre leaps of faith. Lower oil is like lower taxes. It's a huge win, which is why the central premise that the market must go down on oil's weakness is just hogwash. And as long as you use common sense, you are able to profit from it. But if you buy in to the "action," you will simply be a victim of the rise of the machines.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.
Editor's Note: This article was originally published at 2:08 p.m. EDT on Real Money on Oct. 27.