Look at the banks, for example, said Cramer. When the financial crisis began it didn't matter whether a bank was doing well or not. If it was a bank, its stock was headed lower regardless. Cramer said the key is figuring out which stocks in a sector, if any, can buck that trend.
When the retail sector began to come back into favor in 2009, Cramer said he immediately gravitated towards the discounters, the dollar stores in particular. Why? Because he knew that stocks like Dollar Tree (DLTR) and Dollar General (DG) already had earnings momentum, so when money began returning to the retail group the dollar stores would shine.
Sector is even more important when it comes to technology stocks. This is, in part, because technology makes up a whopping 15% of the S&P 500, but also because technology encompasses a host of sub-sectors -- everything from semiconductors to disk drive makers, software companies to cloud computing and infrastructure players. Cramer said each of these sub-sectors is unique, with its own set of growth rates and expectations.
When investing in tech stocks, Cramer said investors must pay very close attention to a company's sub-sector and how it relates to its peers. "There is no room for error," he explained, for when a company in this group misses earnings, its shares get pancaked immediately.