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 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.

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 5 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.

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.

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 3 percent for the entire study sample, and almost 7 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.