Jim Cramer’s 3 Key Things That Move This ‘Crazy’ Market

NEW YORK (Real Money) -- This market has become so crazy that each session has its own rhythm and its own soul.

That's right, every session isn't just one session, it's three sessions, and that's adding to the confusion and the overall defeatism that surrounds trading every day.

The first session occurs at the open and takes its cue from the data andstock action in China and the concomitant trading in Europe. Unlike most times in history, the futures are almost entirely in control of this part of the day. So here's how things play out. We get a lot of information from China and all of it is bad. Most of it is also worse than expected, although you have to figure those that set these expectations are brain dead because an estimate that is always high isn't worth a warm bucket of spit. Nevertheless, China "misses" are now legion. That's the first input into the chaos.

The second input is the Chinese stock market, which almost always goes down, and then the most offending stocks are either halted or propped up by the Chinese government each day to assure a more orderly close.

When the Chinese data are worse than expected and the Chinese market is down, Europe trades down hard in lockstep. That's because 25% of China's exports go there, so the two areas are pretty much linked.

Our relationship is more complicated. We don't do a lot of business in China. The Communist Party really hasn't let us do so. What business we do have is typically concentrated in basic tech, cellphones, aerospace and autos. But because of our newfound negative bias, we actually go down harder than Europe on China. That's counterintuitive, especially when what really matters -- and is bullish but being ignored now -- is weakness in the U.S. dollar, which can raise earnings estimates for our internationally oriented companies. But I am just recounting what occurs.

There's a dearth of big mutual fund money coming into the market and a hefty amount coming out pretty much daily, so there's no real support for any rally that's driven by the futures. But the mutual funds are an accelerant to the downside, so if we get a bad opening, it is promptly exacerbated by these institutions suffering withdrawals.

The next session within a session is dictated almost entirely by sellers: the margin session. It tends to begin at about 11:30 a.m., and it involves speculators who borrow money from brokerage firms, so-called margin, to pay for stocks that then come under pressure. When we have hideous down days like yesterday, many individuals don't have the money to put up for collateral against the margin calls they receive today. If they don't send in more money, they have to sell. If they don't sell, then the margin clerks sell for you, so the brokers don't lose money.

That whole process, which can be very disorderly, runs its course by 2 p.m. If there aren't a lot of margin calls, the 11:30 a.m. to 2 p.m. period is benign; if there are, it's tumultuous.

That brings me to the third session, the exchange-traded-fund dominated session that starts at about 2:45 p.m. Many ETFs have to settle up, so to speak, each day. Someone buys an ETF that bets heavily against stocks it settles by knocking down the stocks. Same thing with a bullish ETF. They use leverage, so their influence is magnified. Typically, you don't see them play such an outsized role, but this is not a typical market. Corporate buybacks often cushion the blow of the ETF selling, but they are halted at 3:30 p.m. in order for a company not to be able to control the price of its stock at the close. That's a shame because right now the market is so thin that the ETFs pretty much determine the close. These ETFs, again, exacerbate the direction. Traders spend the afternoon trying to game how the ETFs will settle. Ugliness can breed further ugliness.

So, let's recap: The 9:30 a.m. session is controlled by the futures reflecting overseas; the 11:30 a.m. to 2 p.m. session reflects margin pressure; and the final session revolves around gaming how the ETFs might move markets.

I wish that any of these sessions had to do with individual stocks, but they have become quaint abstractions in this new world of ETF and futures-driven dominance.

  At the time of publication, Jim Cramer's charitable trust Action Alerts PLUS held no positions in stocks mentioned.

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