On Tuesday, CNBC’s Jim Cramer discussed the life cycle of a market rally, warning investors about purchasing speculative stocks in this current market scenario.
“When the Fed meets tomorrow, if it doesn’t show any sign of dovishness, if it dismisses the cooler inflation numbers like today’s CPI, consumer price index, you need to brace yourself for a sell-off,” he said. “And the epicenter of the decline will not be the solid stocks that deserve to go higher—it’ll be the most speculative stocks that’ve already had huge runs.”
According to Cramer, the success of the strongest businesses, such as the “Magnificent Seven” tech stocks, marked the beginning of the boom, which later spread to allied industries like enterprise software, semiconductors, and cybersecurity. He continued by saying that as interest rates began to decline, the rally spread to cyclical industries like merchants, airlines, railroads, and homebuilders.
He continued by saying that many “late-to-the-rally” investors have a tendency to choose risky equities with short positions because they want to see quick gains.
“I never like to see this kind of speculative frenzy because of what it represents,” Cramer said. “Remember, I’m tracing the life cycle of a rally here, and rallies tend to stop once the rank speculation gets too heavy. I see that happening now.”
Affirm Holdings, a “buy now, pay later” company, was dubbed by Cramer a “poster-child” for this stage of the rally’s late stages—a losing business with a volatile stock that has seen huge gains but might fall if the Federal Reserve signals rate hikes. He advised investors to cash in on their gains in Affirm right away. In this “speculative cohort,” he also mentioned a number of other stocks, such as Coinbase, Upstart, Roku, and Carvana.
“I just gave you the anatomy of a rally. We just don’t want it to be an obituary of the rally,” he said. “If stocks are levitating on a combination of short squeezes and Johnny-come-lately buying, and there’s not selling from the people who are being greedy right now, take it from this one-time obituary writer: the funeral parlor beckons.”