The machine broke down today, Jim Cramer told viewers of his "Mad Money" TV show Tuesday. And it happened very quickly -- too quickly for people to react.
An "overheated market" in China and system error caused the U.S. market to drop 416 points in the blink of an eye, he said. Although there were plenty of buyers, they "simply couldn't get to the floor fast enough to buy."
Meanwhile, the selling, perhaps exacerbated by exchange-traded funds, "cracked the dam," Cramer said.
In the old days, when things were sane, there were order imbalances, a stoppage of trading; but things are different now: "You can force the market down," Cramer said.
"My sources indicate that a big options trade went awry and some concentrated ETF selling ... simply crushed this market as easily as a knife through butter."
The "most important takeaway" here is that market players only have three protections "from the whims of a broken system," he told his viewers.
First, there are companies that pay dividends equal to or better than Treasuries after taxes -- a "great defense," Cramer said.
Then there are stocks that are "so low in valuation" that investors and the companies themselves know they are bargains, "meaning they are buying back stock right here," he said.
Or finally, you need to have companies that are so defensive in nature that if there is a worldwide slowdown, these companies will meet their expectations regardless, Cramer said.
If a company does not have at least one of these three protections, investors will not be OK for now, Cramer said.
Opportunity Still Knocks
After the "worst trading day in years," there is still something "beautiful" happening in a distant corner of the ugly market, Cramer told viewers.
He advised people to take this selloff as an opportunity to start buying financials -- in particular one of the five major brokers:
. Cramer owns Goldman for his charitable trust,
Action Alerts PLUS.
For the first time in his memory, all five big brokers are "being run by great management," Cramer said, adding that a company's management can make or break its performance.
Here are the five "best run companies on Earth," and they are selling at a "major discount," a 30% markdown compared with the average stock, he said. This, Cramer said, will not last.
The thing that attracts him to these stocks now is that they've been getting killed for the past five days, Cramer said. "These are the kinds of pullbacks you need to be on the look out for," he said.
Cramer recommended that people start putting money into one of these names. "They will go lower before they come back up, but I'd start my position as they go down," Cramer said.
Out of them all, Cramer likes Goldman Sachs the most, calling it "the best run I've ever seen it." However, Cramer said he is in favor of people buying any of the five, and he urged market players to pick up one of these stocks as he believes that the management at each of these "top-notch" brokerage houses knows what its doing.
Don't Sell, Don't Sell
History tells market players that they should be ready to buy after a down day in the market -- if not immediately, then soon after, Cramer told his viewers.
The 9/11 selloff looked as if it was the end of the market, and during the crash of 1987, the market fell 508 points, the largest one-day percentage drop in history, Cramer said.
But a few months later, people who had panicked and sold everything wished they had bought something instead.
Today's drop is similar to the crash of 1987, Cramer said. While a Chinese selloff started the selling today, the German market caused it in 1987, he said. And just as the market did not reach a bottom the same day, Cramer believes that we have not seen the end of the selloff here, either.
"That is why people should be in a protected zone" and look for dividends and buybacks, he said. Cramer urged people not to panic, to keep a cool head and to be buyers. He said people should not buy all at once, not expect immediate gratification and be patient.
Otherwise, Cramer believes that three months from now, people who will have sold everything will wish they hadn't.
And Don't Buy ...
Cramer welcomed James Morgan, the president and CEO of
, to the show and asked him why people should buy the stock after the company's recent miss.
In terms of the quarter, though it was on target, the disappointment was related to the projection Daktronics gave for the coming quarter, Morgan clarified.
He added that the underlying drivers of the business are still intact and that Daktronics has "invested a lot of capacity to be able to respond to growth" that the company anticipates.
"One of the limiting factors is getting though the regulatory constraints that exist," Morgan continued. Although there is a very good revenue model with digital billboards, limiting constraints on how quickly the billboards can get deployed are a reality, he said.
Cramer said he is on the fence regarding the stock and put Daktronics in the "don't buy" camp for now.
To view Cramer's interview with James Morgan, please click here.
Cramer was bullish on
Procter & Gamble
Cramer was bearish on
Choice Hotels International
For more of Cramer's insights during the Lightning Round, click here
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At the time of publication, Cramer was long Goldman Sachs and Diageo.
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