Market Is Not Out Of The Woods Yet – Cramer's Mad Money (2/6/18)

Stocks discussed on the in-depth session of Jim Cramer’s Mad Money TV Program, Tuesday, February 6.

The market had a partial rebound on Tuesday and this just confirms the fact that no one can make money while panicking. Despite the rebound, the market has not found a bottom yet and it is not out of the woods. “I think the velocity of the selloff was directly related to some abstruse financial instruments that ended up putting a ton of additional pressure on the actual S&P 500,” said Cramer. “When the VIX started to rise on Monday, the XIV shorts started to unravel, leading to a tail-wags-the-dog effect that sent the broader market into a tailspin faster than expected,” he added.

As the VIX rises when there is a selloff, fund managers thought they’d take advantage of this by loading up on XIV so they can profit when the VIX settles down after the big selloff. However, as VIX kept rising, it led to destruction of XIV. “This inverse VIX thing, the XIV for short, was practically designed to fail. It should never have been built,” said Cramer. That’s the reason Credit Suisse (NYSE:CS) is liquidating the XIV ETN. Those who had losses in XIV, then sold S&P 500 futures to cover them which led to the selloff effect being bigger.

Cramer said earlier that the selloff was phony. The S&P’s proprietary oscillator also had a reading of -6.8 on Monday. “Any time it goes below negative 5, that’s considered very oversold and tends, almost always, to lead to a bounce,” said Cramer. Looking at the historical trend, 4 out of the 5 readings of -5 ended up being good buying opportunities.

“Here’s my bottom line: today’s bounce was a relief, but don’t let it go to your head, please. Just because we had a big up day does not mean we solved all the problems that caused us to get slammed yesterday and last week. Inflation and rising interest rates are still with us and they are a negative,” he concluded.

Off the charts

Cramer went to the charts of FANG stocks with the help of technician Bob Lang to get a sense of when they will stabilize.

It has been five years since Lang came up with the acronym FANG for Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). Despite all the selloffs in the last five years, these four stocks have always bounced back and their gains have been terrific with Facebook going up 537%, Amazon up 441%, Netflix up 967% and Alphabet up 183% while the S&P 500 went up 78% in that period.

The chart of Facebook shows a series of higher highs and higher lows which is a bullish sign. The floor of support at $180 has held three times since the fall. “He likes that the Chaikin Money Flow, which measures the level of buying and selling pressure in a stock, has remained positive indicating the big institutions still have an appetite for Facebook. Put it all together and he wouldn’t be surprised if Facebook can make a move to $200 in the not-too-distant future,” said Cramer.

The Chaikin Money Flow for Amazon also remains strong as the stock rallied after reporting great earnings and then had a small fall during the selloff. The stock’s recent rally has come on strong volume and Lang thinks it could head to $1,500 soon.

Netflix has run up a lot in the last five years and the stock fell during the selloff from its all-time highs in January. Since the decline happened on weak volume, it could indicate that the move will be short-lived. The Chaikin Money Flow is still high for the stock and it has a floor of support at $242.

Lastly, the stock of Alphabet went down after weaker than expected earnings. Lang is not confident about this stock as the MACD has made a bearish move. The Chaikin Money Flow indicator is still strong and Lang is bearish on Alphabet. “Put it all together and Lang could see Alphabet bottoming out at the current levels. He thinks the $1,050 level would be a buying opportunity, and if the stock can settle down a bit, he wouldn’t be surprised if it can head back to $1,200. But he says it’s probably going to $1,050 first,” said Cramer.

Selloff strategy

Cramer continued taking viewer calls in his selloff strategy session.

Which is the best asset class for long-term investment? Cramer said that stocks still remain the best investment class for the long term. He suggested that if the money is required in the next five years, then he can raise cash by booking profits.

Why did the market simply change direction? The market got overheated after Trump’s tax cuts.

What to do with the child’s 529 savings plan which is fully funded? Cramer said that you only need to win once and it’s time to lock in gains.

What are the trading strategies in a volatile market? Take profits on big up days and buy on big down days.

Apple (NASDAQ:AAPL)

Apple’s stock rallied 4% after the selloff. Despite the negative analyst chatter, the stock rebounded.

When the analysts are at their worst, Apple is at their best. Even when Apple was being called out for doom after the iPhone 6S cycle, all Apple did was keep going and their revenues did not decline as was expected.

Apple is still making money, expanding in China, cloud services are going up and it is repatriating overseas cash. Despite all this, it trades at a cheap 11.2 times earnings.

CEO interview – Core Labs (NYSE:CLB)

The stock of Core Labs fell just 2.2% during the selloff. Cramer interviewed the oil service technology company’s CEO David Demshur to find out his take on the direction of crude oil.

Demshur said that their company’s technology allows oil producers to extract more from their oil wells for long periods. With growth in technology, break-even has fallen to $40/barrel from $80/barrel. The company is creating market share with innovation in technology that increases oil recovery rates. “We’re creating new markets for Core Lab to thrive in,” he added.

“If you look at worldwide production, the world has drawn on inventories now 17 months in a row. So worldwide inventories are now right around 40 days of supply. Usually, at that level, you start to get very stable oil prices. Once we dip below that 40-day in inventory, we start to get increases in crude prices and we think that’s going to happen over the next six or so months,” said Demshur.

Viewer calls taken by Cramer

Micron Technology (NASDAQ:MU): If the stock doesn’t take out its high, it will be the top. The stock is inexpensive but it is still a commodity maker.

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