Stocks rallied on Thursday, but Jim Cramer says it wasn’t supposed to happen.
The rally after the Brexit sell-off made sense to Cramer. Day two also made sense because of takeover action in the market and a rally in oil. But day three? That was insane.
“This move is outrageous in its audacity, because so few people believed that it should even be allowed to take place,” the “Mad Money” host said.
It was one week ago that it was predicted that the U.K. would remain in the EU, and the unexpected result of a Brexit took form. Thus, it was natural that there would be a repositioning of stocks in the market with a surprise that big.
Then the unexpected occurred on Thursday.
First was another takeover bid in the entertainment industry, with Lions Gate buying Starz. Cramer interpreted this deal as a sign that the seemingly one-off deal of Apollo‘s Diamond acquisition not being a one-time thing.
The second surprise was the possibility of Mondelez buying Hershey. Cramer was stunned. Many investors had pegged the food group as a flight to safety play from the horrors of a Brexit. In fact, many short sellers were claiming that the group was overvalued.
“I don’t care if Hershey rejected the bid. Here is what matters: For two days, Monday and Tuesday, we heard that the world was coming undone. We, meaning you and I, may just take in stride … but the hedge funds don’t do that,” Cramer said.
Often when the market is in free-fall, hedge funds will create short positions. When stocks lifted on Tuesday, hedge funds used it to place bets against various companies, Cramer said.
Takeovers changed everything. Short sellers fear only one thing — a buyout. That is exactly what happened with the hotel, entertainment and food bids.
Suddenly out of nowhere — after a Brexit was supposed to create a disaster in the stock market — acquirers came out of the woodwork to spend billions to buy other companies, which crushed the short-sellers.
Ultimately, when investors are scared and hedge funds take action to short stocks, the market can have an explosive reaction when those short-positions go astray.
“That is exactly what happened today, and all I can say is that it is a sight for sore bull’s eyes,” Cramer said.