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Today, out of nowhere, people are suddenly feeling better about the stock market, Jim Cramer announced to his Mad Money viewers Thursday after the first strong rally in what seems like forever. What changed in 24 hours? Cramer noted a few key changes.
First, Cramer said investor sentiment has gotten worse, something that needs to happen before a bottom can be formed. From front page stories talking about the market’s woes to the voracious selling in Cramer’s FANG group of high-growth tech stocks, you can almost feel investors giving up.
Next, there was relief from China, which managed to end its day on an up note, and from oil, which also continued to distance itself from its sub-$30 lows.
But most important to Cramer was the final positive, a Federal Reserve governor, St. Louis Fed chief James Bullard, giving an interview where he indicated the Fed is not living in a vacuum and won’t continue to raise interest rates with commodities, and most of the world, in turmoil.
We’re not out of the woods, however. Which is why Cramer said to use any strength to sell the laggards in your portfolio before the next downswing is upon us.
When Cheap Isn’t
Investors looking to pick up some “cheap” stocks with low price to earnings multiples need to think again, Cramer told viewers. Sometimes a an ultra low P/E is a big red flag.
They’re called value traps, Cramer explained, and they’re companies that look cheap but really aren’t because the earnings estimates that make up the “E” in P/E come into question.
Case in point: offshore driller Ensco (ESV – Get Report) , the $11 stock that trades at just 4.9 times its earnings estimates of $2.27 a share. The stock may look cheap down 80% over the past two years, especially in a market where the average stock trades for 16 times earnings. But in reality the earnings estimates for Ensco are too high.
Its business is eroding daily from $30-a-barrel oil that makes pricey offshore drilling rigs completely uneconomical. Cramer noted Ensco also seemed cheap in 2014, when shares traded at just eight times earnings. Back then, shares were $50.
Other value traps include Freeport-McMoRan (FCX – Get Report) , U.S. Steel (X – Get Report) and even the airlines, which while benefiting from lower fuel costs are suffering from increased competition and an overall global economic slowdown.
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