The Jim Cramer of CNBC indicates that the stock market crash in 1987 provides an important lesson that can be used to understand the recent selling of AI stocks.
Monday marks the 39th anniversary of "Black Monday." On October 19, 1987, the Dow Jones Industrial Average plummeted by 22.6% in a single trading day. This historic crash was partly driven by portfolio insurance strategies, which were intended to help investors protect against losses, but instead triggered wave after wave of automatic sell-offs, leading to a significant decline in stock prices.
"Crazy automatic selling orders destroyed the stocks, even though the fundamentals of these companies were actually quite strong," recalled the host of "Mad Money," "Looking back, that was an excellent buying opportunity."
Cramer believes that similar disconnects can also be observed in the current AI transactions.
Last week, the S&P 500 index fell by nearly 2%, recording its largest single-week decline since the end of June; the Nasdaq Composite Index dropped by 4.5%, ending a four-week consecutive rise. Semiconductor and data center stocks were particularly hit, with many individual stocks declining simultaneously without any apparent deterioration in fundamentals.
"One thing I've always wanted to teach everyone in this program is how much the stock price can deviate from the intrinsic value of a company," said Cramer.
Cramer There are suspicions that the selling pressure last Friday may have been exacerbated by a forced liquidation by a hedge fund, similar to the collapse of high-leverage funds Situational Awareness this summer. Although it has not been confirmed whether there were any other similar liquidations, such situations could force funds to sell stocks in order to cover their losses. Regardless of whether these companies actually have problems or not, their stock prices will be affected negatively.
“I think the same situation we see now applies as well – in some, but not all, data center stocks, the stock price has almost nothing to do with the fundamentals,” he said. “They always rise in batches, even when they shouldn’t rise so quickly; and when they fall, they fall together as well, as if nothing has happened to the companies themselves, just like in 1987.”
For investors, the key is to distinguish whether a stock's decline is due to weakening business performance or to external forces beyond the company's control.
"On the anniversary of this great collapse, please remember that on this 'Green Monday,' what you may be witnessing are huge fluctuations caused by the actions of fund managers—either they overreact or lose control during their skiing turns—all of which are completely disconnected from the fundamentals and have no relevance at all," summarized Cramer.
The reason he calls it "Green Monday" is that the S&P 500 and NASDAQ regained some of the losses from last Friday on the first trading day of this week.
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