RealMoney Radio Recap: Fear Factor

"Remember when the movie Jaws came out and it spooked the living daylights out of you?" Jim Cramer asked his "RealMoney" radio show listeners Friday.

Some people never got back into the water again after the movie, and he said that the financial equivalent of that fright is happening in the stock market right now.

The last eight days have been hideous, said Cramer, due in large part to the fact that the Federal Reserve seems set to raise interest rates.

He said that the downfall began Wednesday when a government report hinted at inflation.

But it's not merely inflation that encourages the central bank to raise interest rates, he said. It's speculation. When there is speculation in the market, as there has been in real estate in the 1980s or in the dot-com rush of 2000, then the Fed raises rates to encourage people to keep their money out of these sectors, he said. Higher rates make it more attractive to keep money in the bank.

Now we have a situation where tech, financials and health care have bottomed, Cramer said. Machinery is trying to bottom, so he is picking at these stocks for his charitable trust Action Alerts PLUS.

But he's still worried about oils, materials and mining. We haven't found a bottom, he said, and these are the sectors that the Fed wants to cool off because they have been so hot.

"When I see this happening, I like to circle the wagons around the stocks I feel the best about," Cramer said. He suggested selling off the weaker stuff, but added that he doesn't mind buying a little in sectors that are in freefall, so long as he believes they will rise again. He said he would look at Schlumberger(SLB Quote) and Alcoa(AA Quote), which had some of the best earnings in their respective sectors.