For instance, sometimes the market is hit with a huge pullback and a lot of stocks go down even though it has nothing to do with fundamentals of the company. Hedge funds that are in trouble will start selling to raise money to pay back unhappy clients who are demanding money.
Or sometimes there is a red-hot deal, like a Facebook (FB) or Alibaba (BABA),
which is so massive that the mutual funds have to sell stocks in order
to raise cash to get in on the deal. It's crazy, but mutual funds don't
keep cash on hand to make these kinds of investments. That means they
don't have enough cash to participate in these big deals unless they
sell stocks they own.
But regular investors will see the
selling and start to panic, dumping stocks in turn. Ultimately, this
will trigger a selloff, and the media will try to cook up reasons all
over the place to explain why otherwise stable stocks went down. It can happen to commodities, too. Cramer saw it first hand when oil ran up to $147 a barrel in 2008, even as demand for petroleum was stable to weaker, which should have caused oil to go lower. Only after that insane rally did he find out that oil skyrocketed because a couple of hedge funds had bet against oil, and had to buy in their shorts at insanely high prices. Sure enough after that huge run, oil fell straight back down to $33 a barrel as hedge funds sold it off to raise cash.
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