CNBC’s Jim Cramer warned investors about taking every individual stock move to heart. He said these sudden moves are often arbitrary, and suggested investors focus on a company’s underlying business.
“When you’re evaluating a stock, take your cue from the fundamentals of the underlying company. Don’t put too much significance on day-to-day gyrations in the share price,” he 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 know or it’s just noise that means nothing.”
Cramer added that stocks can see major single-day advances or declines for no good reason. Even the best stocks can quickly become overbought, followed by an inevitable decline, he said. At the same time, if bad stocks get oversold, they can briefly rally, he continued.
While it’s difficult to decipher this “noise,” Cramer conceded that irregular moves can be valid signals. For example, if a company gets a downgrade and the stock doesn’t plummet, it “often means that it’s putting in a bottom and is ready to rocket higher,” he said. And if a stock declines after reporting a great quarter, it could mean that it’s reached a top.
In general, Cramer said investors can’t discern “hidden messages” in the way socks are trading. To him, it’s not wise to pick stocks based on what’s in or out of style on Wall Street.
“When you see dramatic swings in individual stocks, your mind will try to draw a connection to the fundamentals, the real world facts about how the underlying company’s actually doing,” he said. “Sometimes that connection genuinely exists. Other times, the action in the stock is noise, not a signal, and you’ll end up feeling very foolish if you take your cue from that kind of action.”
