Trading Around Cramer Picks

[kellogg1179]

I am a Ph.d. student at Northwestern's Kellogg School of Management and myself and two colleagues of mine (also from Kellogg) just finished a research paper concerning what happens in the market surrounding Cramer recommendations. I am posting a summary of the details here and a link to the paper since I am really interested in getting Mad Money viewers' feedback.

Our paper is posted on the Social Science Research Network (SSRN) at:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=870498

Our analysis provides evidence of the following:

(1) There is a statistically significant run-up in price even before Cramer recommends the stocks on air which suggests information is leaking out before the recommendations are made.

(2) Cramer pushes up prices about 5% overnight for the smallest stocks and about 2% overnight for our entire sample. However, the entire run-up in price (including the run-up due to information leakage) completely reverses within several trading days (i.e. stocks, on average, fall to their original prices).

(3) Volume on the days after a Cramer recommendation is much higher than normal - for example, for small stocks, Cramer picks are 890% of normal volume on the day after his recommendation.

(4) The amount of short-selling is also much higher following Cramer picks which suggests short-sellers are part of the mechanism that push prices back to their original levels.

A study like this is appealing from an academic's point of view because it provides evidence against the Efficient Market Hypothesis (since, by (2), returns are predictable in the days following the recommendation) but may also be useful for Cramer viewers who buy when the market opens following Cramer's recommendations. They are, in our analysis, the net losers. (1) suggests that such viewers pay higher prices (since information is leaking out before the recommendation) and (2) suggests prices fall once they buy.

Any comments on our results or analysis would be greatly appreciated.

Best,

Joey Engelberg
Kellogg School of Management

[madcowdisease]

I don't mean to burst your bubble but just about everything you stated above has been posited already in these forums. I will read your paper for nostalgia's sake since I love all things academic and don't come across much academia since graduating.

Kudos on the empirical data supporting the run-up before he mentions it. If you search the threads below this one you'll come across my theory Cramer's picks were being leaked before the show airs. Whether Cramer is complicit or it's the prop boy sending the ticker via a text message to his buddy is anybody's guess. But yes, avoid Cramer's picks like the plague if you want to make any money.

[kellogg1179]

madcowdisease, thanks for the reply. Don’t worry about my bubble - it is still intact. I am glad we could document empirically what you (and others) have already found anecdotally.

Best,

Joey

[useful]

Here is my 2 cents on your wonderful reaserch.I have already posted it here under after hours on Jim Cramer's stocks.

I would like to write about my observation of this show for past 3 months. The show airs on CNBC at 5.00 PM CST. We are told that it is live show for general audience at this time. I have been watching this show faithfully for past 3 months.
I have noticed the following issues:
1) Jim recommends 2 or more stocks at the start of the show (in first 15 minutes) with his research of the day. As soon as he reveals the name of the stock, I immediately put in to my watch list that is displayed as streaming live quotes, including after hours.
2) I am able to see the price of that stock at the time of regular closing of the market on the same day at 3.00PM CST. As soon as the stock has been reveled by Jim, it has been already up by 10-25% in price from the time of closing at 3.00PM. This is fact for 90% of the stocks that Jim has talked on live Mad Money TV how between 5-5.15PM CST.
3) Within about 1-5 minutes after Jim has reveled the name of the stock, the price starts to slide at the most about 1-2 %.
4) Next day the same stocks also show some down side during the early hours after the market opens at the regular time (8.30 AM CST)

MY QUESTIONS ARE:
1) Why do the stocks that Jim reveals are already up by 10-25% from the regular closing time of the market?
2) Is there a private audience (live or paid) at the time of recording of the show who may be buying those stocks immediately in after hours? This is the only way the stocks can go up in the after hours before Jim mentions it on the show to general audience at 5:00 PM CST.
3) I am not talking about live audience such that at a special show like at Howard recently etc.
3) Is it possible that the people who may have knowledge of the stocks that Jim is going to talk about in his show that airs to general public at 5:00 P.M CST, have bought it between 3:00PM CST and 5:00P.M CST and now selling it for quick profit while the general public like me are buying it at Jim’s recommendation at the opening of his show?

Examples:
2/28/06 Jim talked about NSTK closed at $20.98 (-0.71) at the closing and was at $22.13 as he revealed it at 5.05pm cst on live show
Jim talked about NUVO closed at $17.59 (-1.12) at the closing and was at $18.33 as he revealed it at 5.09 pm cst
Jim talked about CATG closed at $13.80 (+0.23) and was at $14.89 as he started revealing it?
Jim Talked about 2 stocks on 2/27/06
SHW It was closed at $42.59 (+1.30) at 3pm CST and the show aired live at 5pm cst and at 5.02pm cst the stock was already trading at $44.21.Can someone explain me what happened between 3pm-5.02pm cst?
WGII It closed at $58.29 (-0.24) at 3pm cst, and was trading at $60.19 at 5.17pm cst when Jim revealed it live on the show. Explain me ,please, How do I invest in it
Jim talked about 2 stocks on 2/10/2006
IFS It was closed at $17 (00.02) at the regular closing time of the market and as soon as Jim revealed it on the show at 5.14PM CST the stock
Is already trading up at $18.44 in after hours.
Jim talked about 2 stocks on 2/9/06
PTIE It was closed at $9.10 (+ 0.09) at the closing and at 5.04PM CST as soon as Jim revealed it, it had been already trading at $10.30
PSA It was closed at $73.92 at the closing and at 5.14PM CST as Jim mentioned, it was trading at $75
Jim talked about 4 stocks today 2/8/06:
EDO It was closed at $25.85 ( -1.65) at the closing of the market. At 5:04PM CST Jim revealed the stock on his show and it was already at $27.19
AXYS It was closed at $16.12 (-0.12) at the closing of the market. At 5:06 PM CST Jim revealed it on his show and was up to $17.85 at that time.
VTSS. It was closed at $2.87 (+ 0.19) at the closing of the market. At 5:16 P.M CST Jim reveled the stock on the show and was already up to $3.48
I thought to ask you this because there must be a legitimate explanation. I have considered Jim as my guru of stock market and I hope he or someone from the staff attains to my request and answers me.
Thank you.

My Observation, Today, on March 20 Jim revealed the stock MSPD at 5.15 PM CST, the stock closed at $3.30 (-0.25) at 3.00 PM CST and as soon it was revealed by Jim at exactly 5.15 PM CST it was at $4.26 and then started sliding (sell off) all the way to $3.99.
I would like to thank all the readers of my posts. I also luv Jim Cramer as I have said he is my Guru and like his show Mad Money (except when he chews on those bulls /bears and spits off… filthy) I am here not accusing anybody either Jim, his staff, crew, cue card holder or eves dropper on his notes. But this is facts and facts about the after hour trading on the Jim Cramer’s recommended stocks. Few responders mentioned that he talks about the stocks on “Stop Trading” on CNBC , O.K, here is my observation today, 3/20/2006. This usually comes at 3.30PM EST, and today (3/20) Dilan at CNBC brought him at 3.40 PM EST and immediately Jim mentioned 2 stocks PORK AND SFD , please look at the charts and see, at 3.30PM EST before it was revealed and and at 3.40PM EST (sell) when it was reveled after Dilan questioned him on live CNBC.I don’t want be biased or paranoid. As mentioned here, I am still looking for a legitimate answer. Just to let the readers know that I subscribed his Action Alert in January 2006 and I kept receiving the e-mails, mostly before market closes, about what stocks he is going to sell or buy.,but no mention about what he would say on Mad Money. I faithfully listened to his Real Money Radio that is in Real Audio format and can be listened two times and never he revealed any stocks that he revealed on Mad Money. I unsubscribed after one month. I just think it is not coincidental.
Thank you for reading.
Good luck with THI

[Mad Money Machine]

So on Mad Money on Tuesday the 21st, Jim was talking about buying two stocks on the secondary and he said, "...and if those boys from that school in Northwestern who are takin' my picks, if you count the current price and not the in-the-hole price, I think you have done me a great disservice. [sound of automatic rifle] That's to the people who did me the disservice..."

I'm assuming that Jim is referring to the paper mentioned at the top of this thread. Am I further to assume he believes the paper is a "disservice?"

I'm going to bring this up on my show MMM-015 that will be coming out tomorrow.