Chasing Mad Money picks

Lynn O’Shaughnessy of the Copley News Service has a story on the wire about how chasing Jim Cramer’s picks from his “Mad Money” show might not be the best thing for investors.

O’Shaugnessy writes, “What the researchers documented was an eagerness by investors to swallow Cramer’s bait. The show is recorded 30 minutes after the markets close, but by the next morning, the highlighted stocks encounter a sudden rush of popularity. In fact, the volume for these stocks remained abnormally high for three days. This intense burst of interest pumped up the prices of the featured stocks.

“The price pop was often quite significant. The small- est stocks among those recommended — those in the bottom quartile by size — typically jumped 5.19 percent overnight. The price rise for the entire sampling, which included large-corporation stocks that are harder to move, increased 1.96 percent overnight.”

However, after that, the price falls. O’Shaughnessy writes, “Within 12 trading days, according to the researchers, the paper profits for the smallest stocks disappear. Gains for the overall stock sampling also quickly evaporate.

“The study also concluded that ‘Mad Money’ attracts many vultures, who tune into the show to feast on fresh meat. Short- sellers bet against the Cramer addicts, who are backing up their 18-wheelers, because they suspect that these stocks will deflate quickly. And when they do, the short-sellers, who are most likely hedge fund managers, want to cash in.”

Read the rest here.