Jim Cramer says the market rotation isn’t all about small-cap stocks

Cramer suggested the market isn’t being led solely by a few smaller-cap companies that are performing well. Instead, he said, large institutions may be buying poor quality small stocks “as part of a larger basket” with indexes like the Russell 2000 or the S&P Small Cap 600. When buying an index, Cramer said it’s necessary “to take the good with the bad.”

This is “not just a small-cap romp,” Cramer stressed. There are also larger companies that have seen huge gains recently as part of the market broadening, he said, noting Monday’s example of McDonald’s. As the fast-food giant grapples with high prices, its stock has been out of favor on Wall Street, with shares down nearly 12% year to date.

Even though McDonald’s reported an earnings miss before the markets opened, the stock was up more than 3% by market close. Cramer said the stock managed to jump because the market is broadening, and investors were intrigued by the company’s plan to bring in more customers with initiatives like $5 value meals.

“There’s no doubt that when Wall Street was still in love with the ‘Magnificent Seven,’ a stock like McDonald’s would have been pelted into submission after reporting such dismal numbers,” Cramer said. “But the market’s fallen out of love with the Seven and, frankly, nobody was truly disappointed by McDonald’s because everyone expected them to have bad numbers.”