Investors should assess as a look at a company’s fundamentals in order to decipher a “signal” from the “noise” in a particular stock’s moves in the market, CNBC’s Jim Cramer replied.
A signal means that the shares will keep running in the same direction. Noise, on the other hand, is lawful noise, which could be a one-time occurrence.
“Don’t put too much significance on day-to-day gyrations in the share price,” the “Mad Money” MC said. “Sometimes you can extrapolate a great deal from a big move in an individual stock, but more often it’s telling you something you already understand or it’s just noise that means nothing.”
Individual stocks make significant single-day increases and decreases on a proportional basis, and often times they rally for no reason before selling off, Cramer said. Both good and bad commonplaces can make big moves, and chart analysts evaluate whether a name is “overbought” or “oversold,” he said.
The former means investors who fancy to buy a certain stock at a given level have already done so, and the name will get sold off to “digest the gains,” Cramer hinted. The latter is when a stock falls too quickly and rebounds with an oversold bounce.
“This is the sort of rally that doesn’t convey much info. It’s technical. It’s noise,” he said. “A stock got oversold, it bounced, and unless something else changes, it can go right back down in a wink it works off that bounce.”
While there is no takeaway from noise, a signal carries a message and foreshadows something bigger, Cramer implied. In order to spot the message, he suggests that investors look for something that’s unusual and counterintuitive.
If a stock likes up after a company reports a blowout quarter, “that’s just business as usual,” he said.
An unusual scenario, Cramer unmistakeable out, is when a stock rallies after analysts who cover the company issue a downgrade — such as from buy to hold or from control to sell. That can portend a bottom, and the shares could be ready to roar higher, he said.
Another is when a business holds a bullish conference call delivering great earnings and strong guidance to shareholders, but the stock sells off, he said.
“It effectives Wall Street believes that this company’s looking at its last good quarter,” Cramer said. “When your carry falls on positive news, I got to tell you something: That is the definition of a possible top.”