What Is a Cramer Bounce?

The Cramer bounce refers to the sudden overnight rise of a stock's price after it has been recommended by Jim Cramer on his long-running CNBC show, Mad Money. This increase in price can be attributed to investors who buy stocks after hearing Cramer's recommendations, hence the term "Cramer bounce." The increase is attributed to Cramer’s reputation as a stock-picking guru, his convincing theatrics and a sheep-following-the-herd mentality.

Key Takeaways

  • The Cramer bounce refers to the increase in a stock's price after it has been mentioned favorably on Jim Cramer's show Mad Money.
  • Jim Cramer is a long-standing American TV personality who promulgates investing advice on stock stips.
  • Research has shown an average of a 3% increase in price due to the Cramer bounce, but the effect is short-lived.

Understanding the Cramer Bounce

The Cramer bounce effect is fairly significant in certain classes of stock. For example, one study, titled "Is the Market Mad? Evidence from Mad Money," released by Northwestern University in March 2006, showed that for smaller stocks, the overnight increase can be more than five percent.

This abnormal increase lasts for only about 12 days, whereupon the stock's price retreats back to its pre-recommended price, assuming no other news has been released.

This is one instance in which it can be argued that irrational investors have a significant effect on a stock's price.

Who is Jim Cramer?

James Cramer is an American television personality, former hedge fund manager and bestselling author. Cramer is the host of CNBC's Mad Money and a co-founder of TheStreet, Inc. The cable television program Mad Money with Jim Cramer first aired on CNBC in 2005.

Cramer founded his own hedge fund, Cramer & Co. (later Cramer, Berkowitz & Co.), in 1987. The fund operated out of the offices of hedge fund pioneer Michael Steinhardt's Steinhardt, Fine, Berkowitz & Co., and early investors included Eliot Spitzer, a Harvard classmate.

Jim Cramer has many fans, but also many critics. Critics often point out that Cramer can be fickle in his investment outlook because he appears to frequently flip-flop from a bullish to a bearish position, to reflect the market's current sentiment. He has had his fair share of failures. In 2008, for example, he interviewed Wachovia’s C.E.O. live on the air, actually talking up the company’s stock immediately before it plummeted.

Cramer’s harsh personality and outspoken ways have led to him having quite the reputation. In fact, as the New York Times reports, he “gets away with a lot” because he also happens to make people, himself included, a lot of money. His tagline on "Mad Money" is that he’s not here to “make friends, but to make you money.” 

Cramer himself has been open about his personal life as well, such as in his autobiography, “Confessions of a Street Addict,” which provided an inside look at both the hedge fund culture as well as his life struggles. While Cramer may be able to provide insight into the market due to his long history on Wall Street and financial background, his advice is limited for individuals who will have differing financial portfolios, risk tolerances, and investment needs.

Is the Cramer Bounce Real?

There are studies depicting the market’s reaction to recommendations made on Cramer’s show. Notably, in January 2009, graduate students from the University of Pennsylvania published a study claiming that over time, the average next-day increase for a stock that Cramer recommended was three percent for the entire study sample, and almost seven percent for smaller cap stocks. They proved through the use of electronic communication networks that most trades came in after 7 p.m. ET, when Mad Money concluded. Another study conducted by Northwestern University, titled "Is the Market Mad?: Evidence from Mad Money," published in 2006, showed that the average cumulative return on Cramer’s recommendation was 5.19 percent, but, more important, almost all the increases were nullified within 12 days.

Cramer recommends stocks with momentum, both positive and negative. His recommendations affect the price, with the impact reversing quickly, consistent with pricing pressure caused by viewers' jumping on Cramer's recommendations. Cramer's sell recommendations also affect prices, though the impact does not quickly reverse.