Cramer explained that in the old days, if a company did well its stock was rewarded; if it didn't, its stock fell. But in today's global market, with ETFs, futures and high frequency trading, this is simply no longer the case. Cramer said that makes understanding why the your stocks are falling crucial.
Cramer said in a really tough market it seems like all stocks are trading in lock step, with the good, bad and the ugly all heading lower. Why is this the case? Cramer said it's because ETFs and hedge funds, along with the futures markets, have turned stocks into commodities, baskets that can be traded at will, despite the underlying fundamentals.
But, Cramer noted, when the selling is done and the panic is over, the fundamentals begin to matter again, which is why stocks with great fundamentals are important. He said the "paper risk," or risk that stocks can go down for any reason, is always present in today's market, and investors need to be aware.
Cramer also warned against risks from short-sellers. He said when the Securities and Exchange Commission discontinued the uptick rule in 2007, it allowed short-sellers to gang up on stocks like never before. He said short-sellers have contributed to the failure of banks in 2008, and are at it again, selling European bonds.Then there are also the double- and triple-levered ETFs, the ones Cramer has railed against many times in the past. He said these funds serve no purpose but to allow big money to make quick gains at the expense of the rest of the market. He said funds like the UltraShort Financials ProShares (SKF), have cost uninformed investors big money because they don't work as advertised. Cramer said his bottom line is that stocks are not cash, and they don't act that way. Investors need to be aware of market risks, paper risks and the risks of short sellers, before the invest their nest eggs.
You're on Your OwnCramer said his final words of warning to investors in this choppy market is to always remember that there is no lifeguard on duty at the Wall Street pool. He said the SEC, which should be working to level the playing field and protect individual investors, isn't doing its job. Cramer said the SEC seems to favor the big money hedge funds and the high frequency traders who turn over their portfolios 11 times a second, over the home gamers trying to invest their 401(k)s. He said today's SEC bears little resemblance to the Arthur Levitt SEC from 1993 to 2001. He said during that era, the SEC worked hard to make the markets safe for individuals. But under the laissez-faire Bush-era SEC all that changed, and President Obama has done little to roll back the the damage. Cramer said the SEC does not "have your back" when it comes to investing your IRA or 401(k). He said investors need to protect themselves from the Bernie Madoffs of the world who offer returns that truly are too good to be true. He said the technology has outpaced the human's ability to deal with this newfound firepower. "We don't have to like it," he concluded, "but we do have to get used to it." To sign up for Jim Cramer's free Booyah! newsletter with all of his latest articles and videos please click here. To watch replays of Cramer's video segments, visit the Mad Money page on CNBC. -- Written by Scott Rutt in Washington, D.C. To email Scott about this article, click here: Scott Rutt Follow Scott on Twitter @ScottRutt or get updates on Facebook, ScottRuttDC
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV