Predicting Market Moves

There's a pretty broad-based consensus that good investors are people who understand how to predict the moves stocks make. That needs to be turned on its head. It's much more important to understand what stocks are predicting when they move higher or lower.

The stock market is perhaps the greatest forecasting machine ever haphazardly and accidentally thrown together by humanity. Typically stocks forecast out about six months into the future. If you understand what it is that they're predicting, you'll have a much better handle on what's going on in the market than if you simply focus on where those same stocks will go next. What stocks are saying is just as important as where you think they're going.

On Mad Money we think it's essential that you know how to read the mood of the market and always keep the predictive nature of stocks in mind.

This is the reason why it can be a good thing to see certain groups of stocks go down. On Monday night's show when Cramer was grading the performance of President Obama's first 100 days, he cited the poor performance of Pfizer, Kraft, Merck, and Procter & Gamble as evidence that Obama was doing a good job. When food and drug stocks go down, they are predicting that the economy will improve. Because people buy these companies when we're headed into a recession and sell them when it looks like we're headed for a recovery--in six months, remember, because that's how far out stocks tend to forecast--they've historically been pretty good indicators that a turn is coming.

Don't get so swept up in trying to predict where stocks are going to go that you forget entirely to look at what those stocks are predicting. It's very useful information. If you believe the weakness in the defensive food and drug names, then you've got the beginning of a great case for buying the more cyclical stocks that do well when the economy starts heating up.



Questions for Cramer? madmoney@cnbc.com
