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Cramer: How oil's 'false tell' could set off a market-changing domino effect
When oil prices (New York Mercantile Exchange: @CL.1) sank on Thursday, Jim Cramer took a look at what truly caused the drop and how cheaper oil's "domino effect" could have a sway on investing patterns going forward.
"Oil is what we call a false tell. It's signaling the wrong thing," the " Mad Money " host said. "In fact, its decline acts as a tax cut, further stimulating global growth."
Though oil recovered from its intraday bottom as the decline was rooted in U.S. overproduction rather than softer demand, Cramer said some financiers still jumped to improper conclusions.
Watch the full segment here:
"They don't stop for a moment analyze why oil is falling, they just say, 'demand must be weak, sell stock, buy bonds.' They don't care about the reason, they just see oil as an indicator of economic health," Cramer said. "That's domino one."
Domino two comes when interest rates start to slide, leading hedge funds to assume faltering demand in the overall economy.
"When interest rates go down they knock over two more dominoes: a decline in the financial stocks and a collapse in the industrial stocks," the "Mad Money" host said.
The financials suffer because money managers start to worry the economy is not in good enough standing for rate hikes, which fuel business and drive bank earnings.
The industrials take a hit because Wall Street assumes falling rates means business is struggling. Paired with congressional gridlock, all this can drive rates to unfavorable lows.
"Why do I find this whole oil train of thought completely absurd? Because if anything, the world's economies are growing faster than we thought," Cramer said.
While Cramer is not ignoring oil's moves, the "Mad Money" host insisted that from conversations with big oil players to industrial CEOs' conference calls, demand is solid worldwide.
But the last domino can still come down: a shift in investing patterns. Rather than rushing into industrial stocks, market players start to buy up stocks that do well when the economy slows, stocks that do not need massive growth to meet or beat earnings estimates.
"Here's a classic example: Bristol-Myers [Squibb] (NYSE: BMY). So many people were worried about this company's quarter that its stock ended up being left behind by the entire market. But this morning we learned that Bristol-Myers' best anti-cancer drug, Opdivo, saw its sales grow by 60 percent. Wow. Stock zoomed," Cramer said.
Investors also flocked to drug maker AbbVie (NYSE: ABBV), which hit an eight-month high after its Thursday earnings report thanks to its key arthritis and psoriasis medication, Humira.
They bought semiconductor play Xilinx (NASDAQ: XLNX) on strong growth and takeover potential. They added shares of ServiceNow (NYSE: NOW) because its earnings report exceeded expectations.
Another popular stock was CNBC parent Comcast (NASDAQ: CMCSA), with 25 percent cash flow growth stemming from over 400,000 broadband subscribers this quarter.
"Now, I expect when oil bottoms and I think it will shortly, as today was a big capitulation day, the hedge funds will reverse a bit and will go and buy back the old industrials and the banks and maybe let up on the fast growth tech and health care," Cramer said. "But the bottom line here is that neither the falling dominoes nor Washington's insanity could stop the stocks of the best of the best in tech and health care that reported today."
Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC and CNBC.com.
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