Want to be notified when a new article is posted? Entere your email here.

Tuesday, July 18, 2006

Can You Make Money Trading Against Jim Cramer?

Jim Cramer of the CNBC show Mad Money is one of the most well known personalities in the investment world. Few people who know him are indifferent about him - either you love him or hate him.

But love him or hate him, he does have a lot of viewers (somewhere between 350,000 and 400,000 at last count). With all those viewers, what effect does a Cramer "buy" recommendation have on a stock's price? Professors Engelberg, Sasseville, and Williams of Northwestern University recently posted a study on SSRN that provides some answers:
  • For the smallest quartile of recommended stocks, average cumulative abnormal overnight is 5.19% (and 1.96% for the overall sample)
  • The returns on these stocks completely reverse within 12 trading days.
  • Recommended stocks have abnormally high trading volume, buy-sell imbalance, and short sales on the day following the recommendation
  • The adverse selection component of the bid-ask spread falls significantly following the recommendation (note: this means that tit's less likely that the market maker is facing traders with inside information)
  • There's a price run-up the day of the recommendation (this is surprising, since the show is recorded, and doesn't air until 30 minutes after the market's closing).
Read the whole thing here.

The most likely interpretation of these patterns is that you have a lot of uninformed traders buying stocks the next day after Cramer recommends them, and they push the stock's price above it's fundamental value. Arbitrageurs are aware of this pattern and start short selling the stock at the same time. Over a fairly short period of time (12 days), their trades drive the stock's prices back down to their "pre-Cramer recommendation" levels.

Note: the authors caution that this might not be a tradeable strategy for a number of reasons. One important reason is the dynamic nature of information about anomalies - as people discover them and publish papers about them, rational players start trading based on the information. This in turn ends up driving future profits from the strategy down to zero.

But all in all, a very interesting paper, and a great example of an apparent market inefficiency.

HT: Marginal Revolution

In case you're interested, here's a study that reports on Cramer's track record over the longer term.

Note: If you're new to Financial Rounds , welcome. I hope you look around a bit -- if you want to find out more about the blog, check out the Frequently Asked Questions (FAQ) page. And if your want to subscribe to our RSS feed, there are links on the sidebar.


Anonymous said...

Many websites are involved in the funny picture concept and they include
the cat playing with the plaything or with the trainer.
Funny Sports Moments would be create in every field of life.
So, to overcome this situation and to remain in a positive mood laughter therapy is the best solution which can be done by
various ways by watching funny movies, by downlaoding some funny pictures or by doing chit chatting of funny
text with your dear freinds.

Check out my webpage: lol pictures

Anonymous said...

Laughter is a best solution of fear, anger and boredom.
But my favorite is the link that tells you about bad dates stories,
of course they are the funniest. By looking at funny pictures and funny dog videos on the internet,
the hours will slip away easily.

Stop by my page :: www.redmascota.com.mx

Anonymous said...

I've listened to this a dozen or more times and still find it delightful and sooooo original in concept. This glass would cost less than $1000 and would be available to almost all the people in Britain. All kinds of sports news today are offered live through the television.

my web site :: Latest Daily News

Anonymous said...

Along with the stories about celebrities and other things,
you will find many different stories about regular people and people who have
made the news for many different reasons. It’s interesting how stars get annoyed
when the paparazzi takes pictures of them. instantly and cannot wait
for magazines then celebritynewsapp is the best
available source which keeps on updating instantly.

My web site ... latest celeb news

Anonymous said...

This is my first time go to see at here and i am in fact
pleassant to read all at single place.

my website sportybee.com

Anonymous said...

Thousands protest in Russia at rallies across the nation.
The mobile news service facility is very new and unique concept that has
created a buzz among every citizen. The facility of websites and online news are also getting lot of appreciation because it is
very time saving and people can read it in between their work.

my web page :: Latest Daily News

Anonymous said...

Aw, this was an exceptionally nice post. Finding the time and actual effort to make a very good
articleÖ but what can I sayÖ I put things off a whole lot and never manage to
get nearly anything done.

my webpage :: Angry Birds Online Spielen

Anonymous said...

This site really has all the information and facts I needed concerning this subject and didnít know who to ask.

Feel free to visit my web blog: Bio Tech College