Stocks had risen too far, too fast and we were due for a decline, Jim Cramer told his Mad Money viewers Monday. But the size and velocity of today's 1,500-point plunge in the Dow Jones Industrial Average had nothing to do with stocks and everything to do with the mechanics of the market. The Dow ended the day down 1,175 points, or 4.6% lower.
Cramer said days like today bring out an ugly truth about the stocks market. The markets are incredibly frail and are moved mostly by mindless, machine-driven trading. When the algorithms tell the machines it's time to sell, sell they do, and with a speed and fury that makes all of our heads spin. Nobody trusts a parabolic move, Cramer added, which only adds to the selling, and frankly, the panic, as investors try to make sense of what the machines are up to.
What was behind the sudden reversal of fortunes? For starters, interest rates are rising. When rates rise, bonds become more competitive with stocks, which in turn puts pressure on the utilities and the REITs. Add to that the fact that there simply aren't enough bears in the market, and many of the bulls had gotten complacent, thinking that stocks could only head higher.
The markets typically turn to the financials on days like today, but that group was rocked by Friday's actions by the Federal Reserve against Wells Fargo (WFC) - Get Report , leaving investors with no leadership sectors to cling to.
Stocks are closer to a bottom than most investors realize, Cramer concluded, but that bottom won't materialize until a leadership group emerges from the rubble. Investors can begin nibbling on names like Amazon (AMZN) - Get Report Tuesday, but you'd be wise to keep your powder dry for a little while longer.
Cramer and the AAP team on Monday evening reiterated to their investment club members that despite the move lower during the day and on and Friday, they are buyers down at these levels. This is exactly the kind of action they readied their portfolio for when they added to their cash position a week ago. Find out what they're telling their investment club members and get in on the conversation with a free trial subscription to Action Alerts PLUS.
Don't Freeze in the Headlights
Big selloffs like we saw on Monday are a miserable, but unavoidable part of investing, Cramer reminded viewers. As long as you don't panic, you can come out ahead in the end.
Markets do not go up in a straight line, after all, so when you look at this market, which was up over 32% since the election, we were clearly due for a correction. No one could have foreseen the machines going wild and taking us all for a ride, but in the end, we were due.
Today's chaos started overseas, with big declines in Europe. That pattern is likely to repeat itself again tomorrow as much of the machine trading now simply trades off other machines. Investors have indeed become worried about rising interest rates and rising inflation, but Cramer said our economy is strong enough to handle four rate hikes this year before interest rates would begin to impact earnings.
As for what's working, Cramer said he likes Amazon, as well as what he deemed "special situations," like International Paper (IP) - Get Report and Westrock (WRK) - Get Report , both of which held up on Friday, but collapsed with the rest of the market today. He also reiterated that banks do better with rising rates, which makes JPMorgan Chase (JPM) - Get Report a screaming buy on the continued Wells Fargo debacle.
Cramer Outlines What's Next
The mechanics of the market may be scary, but even wild declines like we saw today aren't the end of the world, Cramer told viewers, as he answered their questions.
How will investors know when the markets have bottomed? Cramer said stocks typically bottom in thirds, and he expects the financials and the healthcare names to be among the first to stabilize.
As for when to buy, Cramer cautioned viewers to never buy at the open and instead, wait and see if a rally holds until 2:30 p.m. Eastern. If not, there will likely be a second wave of selling.
When asked whether he should buy more Henry Schein (HSIC) - Get Report , Cramer told the viewer that he'd look for stocks with dividends, like Johnson & Johnson (JNJ) - Get Report or Procter & Gamble (PG) - Get Report .
Executive Decision: Cypress Semiconductor
For his "Executive Decision" segment, Cramer once again welcomed Hassane El-Khoury, president and CEO of Cypress Semiconductor (CY) - Get Report , the chipmaker that posted a 25-cents-a-share earnings beat last Thursday, but since has seen shares plunge with the rest of the market.
El-Khoury said business is strong at Cypress and the fundamentals and his company's outlook for the rest of 2018 are all pointing in the same direction.
Cypress is seeing strength across the board, with automotive products up 16% year-over-year, while the Internet of things has grown 46%. The company is also seeing strength in industrial and consumer products as well.
No matter what market you're in, El-Khoury said, you'll find Cypress products, whether it's entertainment or wearables. His company excels in products that need high performance but also require ultra-low power consumption.
Cramer said Cypress is one of the many great companies that have been thrown away as the rest of the market is in decline.
Over on Real Money, Cramer says don't worry about missing anything, we haven't solved the bond conundrum and the evidence says we get to 3% with selloffs on the way. Get more of his insights with a free trial subscription to Real Money.
In the Lightning Round, Cramer was bullish on Regeneron Pharmaceuticals (REGN) - Get Report , A O Smith (AOS) - Get Report , Electro Scientific Industries (ESIO) - Get Report , Exelixis (EXEL) - Get Report , Anthem (ANTM) - Get Report and Tableau Software (DATA) - Get Report .
In his "No-Huddle Offense" segment, Cramer said individual investors can learn a lot from yesterday's Super Bowl win by his beloved Eagles. You, too, can overcome adversity, he said, if you follow these four lessons.
First, have your plan ready so you don't get distracted in the heat of battle. You can't afford to get emotional in the middle of the trading day when the averages are fluctuating by the minute.
Second, take some risks. You need to have faith in your judgments because if you've done your homework, they're probably right.
Third, keep your head in the game. If you get knocked down, get right back up. Sell your weak stocks, and stick with your winners.
Finally, stay humble. Don't get greedy. Take profits. Follow these rules and you will prevail in any market.
And then there's this:
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At the time of publication, Cramer's Action Alerts PLUS had a position in AAPL, GOOGL, JPM.