Jim Cramer unveiled his "3 M's" list of signs that will tell you stocks are about to fall, releasing his rundown of warning signs during an exclusive monthly video-conference call for members of his Action Alerts PLUS club for investors.
"When you think there is going to be a marketwide sell-off, you [want to be ready], because even as I am no longer an active hedge-fund manager. I am not going to just get hit on the head with a two-by-four and pretend it didn't matter," Cramer said.
Cramer said the "3 M's" that will tell you when stocks are nearing a drop include:
- The Macro Environment
- The Micro Environment
- The Market's Mechanics
Cramer's rules dictate that if one of these three things are weak, then a little selling is warranted on your part. If two are weak, then some culling is prudent. And if all three are weak, then "you truly have to take evasive action," he said.
That's why he said smart investors will always look closely at:
The Macro Environment
Cramer noted the market's macro environment has been the worst recently that it's been since last December, when the threat of a U.S.-China trade war and lack of support from the Federal Reserve cooled sentiment.
More recently, he said, the Democratic Party's slate of 2020 presidential candidates "is as far left as I have ever seen in my life," with the exception of former Vice President Joe Biden. "Any one of these candidates would be disastrous for the stock market," Cramer said.
The Micro Environment
Macro issues inevitably bleed into the micro environment, leading to earnings-estimate cuts, Cramer said.
For example, he said that the potential for fresh U.S. tariffs on Chinese goods, which emerged in December after trade talks broke down, seemed likely some of the retail stocks that Cramer's charitable trust owns. "We have companies that can handle tariffs and those who can't," the expert said. "Kohl's (KSS - Get Report) and to some extent Five Below (FIVE - Get Report) can get whacked, [and] Home Depot (HD - Get Report) , too. So, we trimmed some Kohl's, some Five Below and some Home Depot [and] they turned out to be great sales."
The final "M" to consider is the mechanics of the market, such as technical analysis and the new supply of stock provided by initial public offerings.
Cramer noted that charts for much of the market leading up to last month's IPO for Uber (UBER) didn't look very positive just as U.S.-China trade talks were breaking down.
"Charts matter, [and] they were pointed down," Cramer said. "When you get too much supply and terrible breakdowns, you get liquidations."
The Bottom Line
Cramer said that when the three factors above all turn negative, you know something bad is likely coming and you start selling some stock -- as he did recently for his Action Alerts PLUS charitable portfolio.
"When you see the macro, micro and mechanics about to break down, you take action," he said. "That's exactly what we did, and when the selling was over we were ready to buy and we had the cash to do so."
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