Cramer Goes Defensive

Cramer had solidified himself as the rally’s most bubbly cheerleader over the past six months, but as of Thursday night’s Mad Money it appears he is changing his tune. While he is not projecting huge losses, he does think that investors should position themselves defensively for a 3%-5% pullback. In discussion of his reasoning, he stated that his game plan this week was to watch the way the market reacted to earnings reports from General Mills (NYSE:GIS), Bed Bath & Beyond (NASDAQ:BBBY), and Paychex (NASDAQ:PAYX) in particular.

“So what’s happened this week? Sure enough, when General Mills reported a very good quarter, the stock exploded to the upside. When Bed Bath & Beyond also reported a very good quarter, it got clobbered. Paychex, it said nothing good whatsoever about the employment rolls and that pummeled pretty bad, so it’s time to admit it’s time to admit that the negative scenario that I laid out last Friday is now playing out, which means we have to get a little bit more defensive here.

That’s what I’m doing from my charitable trust all day you can follow it all day at I’ve been taking profits in some those big industrial stocks that I told you to do on Friday if you saw this pattern. I’ve been going into more defensive names as I told you to do in the game plan because of this pattern and it’s because the market ended up liking Generals Mills and despising both Bed Bath & Beyond and Paychex. In other words we have to be a tad more cautious. Because the game plan said that if the market, as judged by the collective reaction from the news from these companies, chooses defense over offense, if it chooses the safety stocks over the aggressive ones, then we have to pull in if not bite our horns…The stocks are making sense and even if we don’t like what they’re say, I regard myself as kind of a stock whisperer which is kind of like a horse whisperer only more profitable and I’m telling you the game plan must be obeyed.” — CNBC’s Mad Money 9/24/2009

Love him or hate him, you have to laugh when he calls himself a “stock whisperer.” However, there may be more to this quote than comedy. His reference to the horse whisperer is perhaps coincidentally interesting because he is really basing his investment thesis on his gauge of “animal spirits.” John Maynard Keynes originally coined the term animal spirits to describe human emotion and psychology and how it leads to boom and bust cycles. Most recently, we have seen the market take on a more speculative behavior than normal in the hopes of greater returns on some of the riskiest issues, which has contributed to the market’s impressive rally. However, Cramer is watching a shift in the investor psychology to a more subdued outlook, and he is adjusting his bullishness accordingly. There is no way to really measure a thing like investor psychology, so it really comes from a feeling you have to gauge from watching the way the market reacts to news.

When a major bull like Cramer starts to soften his stance, it does not necessarily mean he is correct. However, we never underestimate the legions of devoted Cramer viewers.

Cramer Going Defensive

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