Jim Cramer always says fundamentals will ultimately drive stocks. But sometimes that doesn't seem to be the case.
At any given time, there are other factors at play and it's critical to determine if they're short-term or long term. Ultimately it will inform your decision.
"Don't get me wrong here," Cramer said, "over the long-haul the best way to pick winning stocks is by identifying winning companies, ones that are growing faster than anyone expects or vastly increasing their dividends or improving dramatically."
It's just sometimes companies that should rally - don't rally. Then, what?
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If that's the case, Cramer said take a look at a few things:
1. Examine how the entire sector is trading via an ETF that tracks the group.
"These days, many investors use exchange traded funds such as the XLF (XLF) or KRE (KRE) to get exposure to entire sectors," Cramer explained.
That can present a problem for a single stocks that make up a portion of the ETF.
"Some of these ETFs buy and sell with a ton of leverage, giving them double or even triple the buying or selling bang for their buck. In turn that means good stocks will move lower with bad ones, simply because of the selling done by these ETFs."
If an entire sector is challenged but a company's fundamentals appear strong -a stock could stall for quite some period of time. "Remember about 50% of a stock's movement has to do with its sector," Cramer said.
2. Hedge funds also present a wild card in the equation.
If a stock you hold isn't rallying but you think it should, you may want to do a little research on whether there's any forced selling happening in the market.
"Stocks can easily get slammed just because hedge funds that own them are in trouble and desperately need to sell everything in order to raise cash," Cramer said. That's called forced selling and usually has to do with an unrelated bad bet.
The sheer volume of selling that hedge funds generate can prevent an otherwise solid stock from making gains.
For example, "Money managers who bet heavily on Europe and lost when the euro zone's sovereign debt induced credit crisis began to dominate the headlines didn't just have to sell their European assets, they had to sell totally unrelated stocks, too." said Cramer.
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High-frequency traders can make the issue all the worse.
"They can effectively hijack an entire sector, causing massive across the board moves that make no sense from the perspective of the fundamentals," said Cramer.
Forced selling typically doesn't last and shares that are dragged down in the process, should rally in due time.
3. Technicals can also impact stock performance.
Much of the market trades technically today. That is, investors closely watch chart patterns and heed the resulting bullish or bearish analysis. In fact, technical analysis is becoming such an important market influence, it too can generate headwinds for a stock that you'd think would otherwise rally. Read More: Off the Charts: How Long Can Bull Last?
"The takeaway here is recognize that price action doesn't always reflect what's going on with the underlying business," said Cramer. "And depending on the catalyst, it could take a while for the stock's performance to sync up with the fundamentals."
However, as we said above, Cramer ultimately believes fundamentals drive stocks. Therefore, if a stock isn't making the gains you'd otherwise expect, determine what you think is holding it back. Then make a decision to either hold or sell from there.
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