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NEW YORK (TheStreet) -- What does it take to stop a selloff in its tracks? Jim Cramer gave his Mad Money TV show viewers his recipe for a rally Wednesday. He said to truly understand today's snapback rally, investors need to first understand the reasons for the selloff.
Cramer explained the April selloff has largely occurred in a news vacuum, with investors having little actual data to go on. That caused many to get too negative and, as Cramer always says, "no one ever made a dime panicking."
Then there were the large hedge funds, which switched into redemption mode and began selling everything to "de-risk" their portfolios. Cramer said wounded hedge funds, much like wounded tigers, are a very dangerous animal.
But today the analysts who have been patiently waiting for the selloff to subside came out in favor of the bull, helping to swing the markets into positive territory. The move was bolstered by Wednesday's lackluster initial public offering of La Quinta (LQ), which proved the markets have finally had enough of the IPO tidal wave.
Further helping things along was positive business news from Alcoa (AA) and others, as well as the latest minutes from the Federal Reserve, which outlined that rate hikes aren't coming anytime soon.
That's how a rally is built, Cramer concluded, and that's how it will likely continue in Thursday's session.
The Window Closes
The initial public offering window is finally closing, Cramer told viewers, as seen in the sharp decline at the open for hotel chain La Quinta. Shares of La Quinta opened at $17 a share and almost immediately broke the IPO price, falling to $16.75 before eking out a small gain by the close of trading. This was after La Quinta lowered its initial pricing between $18 and $21 a share.
Make no mistake, La Quinta is a well-run company with good growth, Cramer said, but given the huge supply of recent IPOs the market simply cannot handle them all and has finally said "enough is enough."